Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-26872 July 25, 1975

VILLONCO REALTY COMPANY, plaintiff-appellee and EDITH PEREZ DE TAGLE, intervenor-

appellee,

vs.

BORMAHECO, INC., FRANCISCO N. CERVANTES and ROSARIO N. CERVANTES, defendants-

appellants. Meer, Meer & Meer for plaintiff-appellee.

J. Villareal, Navarro and Associates for defendants-appellants.

P. P. Gallardo and Associates for intervenor-appellee.

AQUINO, J.:

This action was instituted by Villonco Realty Company against Bormaheco, Inc. and the spouses Francisco
N. Cervantes and Rosario N. Cervantes for the specific performance of a supposed contract for the sale of
land and the improvements thereon for one million four hundred thousand pesos. Edith Perez de Tagle, as
agent, intervened in order to recover her commission. The lower court enforced the sale. Bormaheco, Inc.
and the Cervantes spouses, as supposed vendors, appealed.

This Court took cognizance of the appeal because the amount involved is more than P200,000 and the
appeal was perfected before Republic Act No. 5440 took effect on September 9, 1968. The facts are as
follows:

Francisco N. Cervantes and his wife, Rosario P. Navarra-Cervantes, are the owners of lots 3, 15 and 16
located at 245 Buendia Avenue, Makati, Rizal with a total area of three thousand five hundred square meters
(TCT Nos. 43530, 43531 and 43532, Exh. A, A-1 and A-2). The lots were mortgaged to the Development
Bank of the Phil (DBP) on April 21, 1959 as security for a loan of P441,000. The mortgage debt was fully
paid on July 10, 1969.

Cervantes is the president of Bormaheco, Inc., a dealer and importer of industrial and agricultural
machinery. The entire lots are occupied by the building, machinery and equipment of Bormaheco, Inc. and
are adjacent to the property of Villonco Realty Company situated at 219 Buendia Avenue.

In the early part of February, 1964 there were negotiations for the sale of the said lots and the improvements
thereon between Romeo Villonco of Villonco Realty Company "and Bormaheco, Inc., represented by its
president, Francisco N. Cervantes, through the intervention of Edith Perez de Tagle, a real estate broker".

1
In the course of the negotiations, the brothers Romeo Villonco and Teofilo Villonco conferred with
Cervantes in his office to discuss the price and terms of the sale. Later, Cervantes "went to see Villonco for
the same reason until some agreement" was arrived at. On a subsequent occasion, Cervantes, accompanied
by Edith Perez de Tagle, discussed again the terms of the sale with Villonco.

During the negotiations, Villonco Realty Company assumed that the lots belonged to Bormaheco, Inc. and
that Cervantes was duly authorized to sell the same. Cervantes did not disclose to the broker and to Villonco
Realty Company that the lots were conjugal properties of himself and his wife and that they were mortgaged
to the DBP.

Bormaheco, Inc., through Cervantes, made a written offer dated February 12, 1964, to Romeo Villonco for
the sale of the property. The offer reads (Exh. B):

BORMAHECO, INC.

February 12,1964

Mr. Romeo

Villonco Villonco Building

Buendia Avenue

Makati, Rizal.

Dear Mr. Villonco:

This is with reference to our telephone conversation this noon on the matter of the sale of our property
located at Buendia Avenue, with a total area of 3,500 sq. m., under the following conditions:

(1) That we are offering to sell to you the above property at the price of P400.00 per square meter;

(2) That a deposit of P100,000.00 must be placed as earnest money on the purchase of the above property
which will become part payment of the property in the event that the sale is consummated;

(3) That this sale is to be consummated only after I shall have also consummated my purchase of another
property located at Sta. Ana, Manila;

(4) That if my negotiations with said property will not be consummated by reason beyond my control, I will
return to you your deposit of P100,000 and the sale of my property to you will not also be consummated;
and

(5) That final negotiations on both properties can be definitely known after 45 days.

If the above terms is (are) acceptable to your Board, please issue out the said earnest money in favor of
Bormaheco, Inc., and deliver the same thru the bearer, Miss Edith Perez de Tagle.

Very truly yours,

SGD. FRANCISCO N. CERVANTES

President

2
The property mentioned in Bormaheco's letter was the land of the National Shipyards & Steel Corporation
(Nassco), with an area of twenty thousand square meters, located at Punta, Sta. Ana, Manila. At the bidding
held on January 17, 1964 that land was awarded to Bormaheco, Inc., the highest bidder, for the price of
P552,000. The Nassco Board of Directors in its resolution of February 18, 1964 authorized the General
Manager to sign the necessary contract (Exh. H).

On February 28, 1964, the Nassco Acting General Manager wrote a letter to the Economic Coordinator,
requesting approval of that resolution. The Acting Economic Coordinator approved the resolution on March
24, 1964 (Exh. 1).

In the meanwhile, Bormaheco, Inc. and Villonco Realty Company continued their negotiations for the sale
of the Buendia Avenue property. Cervantes and Teofilo Villonco had a final conference on February 27,
1964. As a result of that conference Villonco Realty Company, through Teofilo Villonco, in its letter of
March 4, 1964 made a revised counter- offer (Romeo Villonco's first counter-offer was dated February 24,
1964, Exh. C) for the purchase of the property. The counter-offer was accepted by Cervantes as shown in
Exhibit D, which is quoted below:

VILLONCO REALTY COMPANY

V. R. C. Building

219 Buendia Avenue, Makati,

Rizal, Philippines

March 4, 1964

Mr. Francisco Cervantes.

Bormaheco, Inc.

245 Buendia Avenue

Makati, Rizal

Dear Mr. Cervantes:

In reference to the letter of Miss E. Perez de Tagle dated February 12th and 26, 1964 in respect to the terms
and conditions on the purchase of your property located at Buendia Ave., Makati, Rizal, with a total area of
3,500 sq. meters., we hereby revise our offer, as follows:

1. That the price of the property shall be P400.00 per sq. m., including the improvements thereon;

2. That a deposit of P100,000.00 shall be given to you as earnest money which will become as part payment
in the event the sale is consummated;

3. This sale shall be cancelled, only if your deal with another property in Sta. Ana shall not be consummated
and in such case, the P100,000-00 earnest money will be returned to us with a 10% interest p.a. However, if
our deal with you is finalized, said P100,000.00 will become as part payment for the purchase of your
property without interest:

4. The manner of payment shall be as follows:

3
a. P100,000.00 earnest money and

650,000.00 as part of the down payment, or

P750,000.00 as total down payment

b. The balance is payable as follows:

P100,000.00 after 3 months

125,000.00 -do-

212,500.00 -do-

P650,000.00 Total

As regards to the other conditions which we have discussed during our last conference on February 27,
1964, the same shall be finalized upon preparation of the contract to sell.*

If the above terms and conditions are acceptable to you, kindly sign your conformity hereunder. Enclosed is
our check for ONE HUNDRED THOUSAND (P100,000.00) PESOS, MBTC Check No. 448314, as earnest
money.

Very truly yours,

VILLONCO REALTY COMPANY

(Sgd.) TEOFILO VILLONCO

CONFORME:

BORMAHECO, INC.

(Sgd.) FRANCISCO CERVANTES

That this sale shall be subject to favorable consummation of a property in Sta. Ana we are negotiating.

(Sgd.) FRANCISCO CERVANTES

The check for P100,000 (Exh. E) mentioned in the foregoing letter-contract was delivered by Edith Perez de
Tagle to Bormaheco, Inc. on March 4, 1964 and was received by Cervantes. In the voucher-receipt
evidencing the delivery the broker indicated in her handwriting that the earnest money was "subject to the
terms and conditions embodied in Bormaheco's letter" of February 12 and Villonco Realty Company's letter
of March 4, 1964 (Exh. E-1; 14 tsn).

Then, unexpectedly, in a letter dated March 30, 1964, or twenty-six days after the signing of the contract of
sale, Exhibit D, Cervantes returned the earnest money, with interest amounting to P694.24 (at ten percent
per annum). Cervantes cited as an excuse the circumstance that "despite the lapse of 45 days from February
12, 1964 there is no certainty yet" for the acquisition of the Punta property (Exh. F; F-I and F-2). Villonco
Realty Company refused to accept the letter and the checks of Bormaheco, Inc. Cervantes sent them by
registered mail. When he rescinded the contract, he was already aware that the Punta lot had been awarded
to Bormaheco, Inc. (25-26 tsn).

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Edith Perez de Tagle, the broker, in a letter to Cervantes dated March 31, 1964 articulated her shock and
surprise at Bormaheco's turnabout. She reviewed the history of the deal and explained why Romeo Villonco
could not agree to the rescission of the sale (Exh. G).**

Cervantes in his letter of April 6, 1964, a reply to Miss Tagle's letter, alleged that the forty-five day period
had already expired and the sale to Bormaheco, Inc. of the Punta property had not been consummated.
Cervantes said that his letter was a "manifestation that we are no longer interested to sell" the Buendia
Avenue property to Villonco Realty Company (Annex I of Stipulation of Facts). The latter was furnished
with a copy of that letter.

In a letter dated April 7, 1964 Villonco Realty Company returned the two checks to Bormaheco, Inc., stating
that the condition for the cancellation of the contract had not arisen and at the same time announcing that an
action for breach of contract would be filed against Bormaheco, Inc. (Annex G of Stipulation of
Facts).1äwphï1.ñët

On that same date, April 7, 1964 Villonco Realty Company filed the complaint (dated April 6) for specific
performance against Bormaheco, Inc. Also on that same date, April 7, at eight-forty-five in the morning, a
notice of lis pendens was annotated on the titles of the said lots.

Bormaheco, Inc. in its answers dated May 5 and 25, 1964 pleaded the defense that the perfection of the
contract of sale was subject to the conditions (a) "that final acceptance or not shall be made after 45 days"
(sic) and (b) that Bormaheco, Inc. "acquires the Sta. Ana property".

On June 2, 1964 or during the pendency of this case, the Nassco Acting General Manager wrote to
Bormaheco, Inc., advising it that the Board of Directors and the Economic Coordinator had approved the
sale of the Punta lot to Bormaheco, Inc. and requesting the latter to send its duly authorized representative to
the Nassco for the signing of the deed of sale (Exh. 1).

The deed of sale for the Punta land was executed on June 26, 1964. Bormaheco, Inc. was represented by
Cervantes (Exh. J. See Bormaheco, Inc. vs. Abanes, L-28087, July 31, 1973, 52 SCRA 73).

In view of the disclosure in Bormaheco's amended answer that the three lots were registered in the names of
the Cervantes spouses and not in the name of Bormaheco, Inc., Villonco Realty Company on July 21, 1964
filed an amended complaint impleading the said spouses as defendants. Bormaheco, Inc. and the Cervantes
spouses filed separate answers.

As of January 15, 1965 Villonco Realty Company had paid to the Manufacturers' Bank & Trust Company
the sum of P8,712.25 as interests on the overdraft line of P100,000 and the sum of P27.39 as interests daily
on the same loan since January 16, 1965. (That overdraft line was later settled by Villonco Realty Company
on a date not mentioned in its manifestation of February 19, 1975).

Villonco Realty Company had obligated itself to pay the sum of P20,000 as attorney's fees to its lawyers. It
claimed that it was damaged in the sum of P10,000 a month from March 24, 1964 when the award of the
Punta lot to Bormaheco, Inc. was approved. On the other hand, Bormaheco, Inc. claimed that it had
sustained damages of P200,000 annually due to the notice of lis pendens which had prevented it from
constructing a multi-story building on the three lots. (Pars. 18 and 19, Stipulation of Facts).1äwphï1.ñët

Miss Tagle testified that for her services Bormaheco, Inc., through Cervantes, obligated itself to pay her a
three percent commission on the price of P1,400,000 or the amount of forty-two thousand pesos (14 tsn).

5
After trial, the lower court rendered a decision ordering the Cervantes spouses to execute in favor of
Bormaheco, Inc. a deed of conveyance for the three lots in question and directing Bormaheco, Inc. (a) to
convey the same lots to Villonco Realty Company, (b) to pay the latter, as consequential damages, the sum
of P10,000 monthly from March 24, 1964 up to the consummation of the sale, (c) to pay Edith Perez de
Tagle the sum of P42,000 as broker's commission and (d) pay P20,000 as to attorney's fees (Civil Case No.
8109).

Bormaheco, Inc. and the Cervantes spouses appealed. Their principal contentions are (a) that no contract of
sale was perfected because Cervantes made a supposedly qualified acceptance of the revised offer contained
in Exhibit D, which acceptance amounted to a counter-offer, and because the condition that Bormaheco, inc.
would acquire the Punta land within the forty-five-day period was not fulfilled; (2) that Bormaheco, Inc.
cannot be compelled to sell the land which belongs to the Cervantes spouses and (3) that Francisco N.
Cervantes did not bind the conjugal partnership and his wife when, as president of Bormaheco, Inc., he
entered into negotiations with Villonco Realty Company regarding the said land.

We hold that the appeal, except as to the issue of damages, is devoid of merit.

"By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to
deliver a determining thing, and the other to pay therefor a price certain in money or its equivalent. A
contract of sale may be absolute or conditional" (Art. 1458, Civil Code).

"The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the
object of the contract and upon the price. From that moment, the parties may reciprocally demand
performance, subject to the provisions of the law governing the form of contracts" (Art. 1475, Ibid.).

"Contracts are perfected by mere consent, and from that moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but also to all the consequences which, according to their
nature, may be in keeping with good faith, usage and law" (Art. 1315, Civil Code).

"Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which
are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance
constitutes a counter-offer" (Art. 1319, Civil Code). "An acceptance may be express or implied" (Art. 1320,
Civil Code).

Bormaheco's acceptance of Villonco Realty Company's offer to purchase the Buendia Avenue property, as
shown in Teofilo Villonco's letter dated March 4, 1964 (Exh. D), indubitably proves that there was a
meeting of minds upon the subject matter and consideration of the sale. Therefore, on that date the sale was
perfected. (Compare with McCullough vs. Aenlle & Co., 3 Phil. 285; Goyena vs. Tambunting, 1 Phil. 490).
Not only that Bormaheco's acceptance of the part payment of one hundred ,thousand pesos shows that the
sale was conditionally consummated or partly executed subject to the purchase by Bormaheco, Inc. of the
Punta property. The nonconsummation of that purchase would be a negative resolutory condition (Taylor vs.
Uy Tieng Piao, 43 Phil. 873).

On February 18, 1964 Bormaheco's bid for the Punta property was already accepted by the Nassco which
had authorized its General Manager to sign the corresponding deed of sale. What was necessary only was
the approval of the sale by the Economic Coordinator and a request for that approval was already pending in
the office of that functionary on March 4, 1964.

6
Bormaheco, Inc. and the Cervantes spouses contend that the sale was not perfected because Cervantes
allegedly qualified his acceptance of Villonco's revised offer and, therefore, his acceptance amounted to a
counter-offer which Villonco Realty Company should accept but no such acceptance was ever transmitted to
Bormaheco, Inc. which, therefore, could withdraw its offer.

That contention is not well-taken. It should be stressed that there is no evidence as to what changes were
made by Cervantes in Villonco's revised offer. And there is no evidence that Villonco Realty Company did
not assent to the supposed changes and that such assent was never made known to Cervantes.

What the record reveals is that the broker, Miss Tagle, acted as intermediary between the parties. It is safe to
assume that the alleged changes or qualifications made by Cervantes were approved by Villonco Realty
Company and that such approval was duly communicated to Cervantes or Bormaheco, Inc. by the broker as
shown by the fact that Villonco Realty Company paid, and Bormaheco, Inc. accepted, the sum of P100,000
as earnest money or down payment. That crucial fact implies that Cervantes was aware that Villonco Realty
Company had accepted the modifications which he had made in Villonco's counter-offer. Had Villonco
Realty Company not assented to those insertions and annotations, then it would have stopped payment on its
check for P100,000. The fact that Villonco Realty Company allowed its check to be cashed by Bormaheco,
Inc. signifies that the company was in conformity with the changes made by Cervantes and that Bormaheco,
Inc. was aware of that conformity. Had those insertions not been binding, then Bormaheco, Inc. would not
have paid interest at the rate of ten percent per annum, on the earnest money of P100,000.

The truth is that the alleged changes or qualifications in the revised counter — offer (Exh. D) are not
material or are mere clarifications of what the parties had previously agreed upon.

Thus, Cervantes' alleged insertion in his handwriting of the figure and the words "12th and" in Villonco's
counter-offer is the same as the statement found in the voucher-receipt for the earnest money, which reads:
"subject to the terms and conditions embodied in Bormaheco's letter of Feb. 12, 1964 and your letter of
March 4, 1964" (Exh. E-1).

Cervantes allegedly crossed out the word "Nassco" in paragraph 3 of Villonco's revised counter-offer and
substituted for it the word "another" so that the original phrase, "Nassco's property in Sta. Ana", was made to
read as "another property in Sta. Ana". That change is trivial. What Cervantes did was merely to adhere to
the wording of paragraph 3 of Bormaheco's original offer (Exh. B) which mentions "another property
located at Sta. Ana." His obvious purpose was to avoid jeopardizing his negotiation with the Nassco for the
purchase of its Sta. Ana property by unduly publicizing it.

It is noteworthy that Cervantes, in his letter to the broker dated April 6, 1964 (Annex 1) or after the Nassco
property had been awarded to Bormaheco, Inc., alluded to the "Nassco property". At that time, there was no
more need of concealing from the public that Bormaheco, Inc. was interested in the Nassco property.

Similarly, Cervantes' alleged insertion of the letters "PA" ( per annum) after the word "interest" in that same
paragraph 3 of the revised counter-offer (Exh. D) could not be categorized as a major alteration of that
counter-offer that prevented a meeting of the minds of the parties. It was understood that the parties had
contemplated a rate of ten percent per annum since ten percent a month or semi-annually would be usurious.

Appellants Bormaheco, Inc. and Cervantes further contend that Cervantes, in clarifying in the voucher for
the earnest money of P100,000 that Bormaheco's acceptance thereof was subject to the terms and conditions
embodied in Bormaheco's letter of February 12, 1964 and your (Villonco's) letter of March 4, 1964" made
Bormaheco's acceptance "qualified and conditional".
7
That contention is not correct. There is no incompatibility between Bormaheco's offer of February 12, 1964
(Exh. B) and Villonco's counter-offer of March 4, 1964 (Exh. D). The revised counter-offer merely
amplified Bormaheco's original offer.

The controlling fact is that there was agreement between the parties on the subject matter, the price and the
mode of payment and that part of the price was paid. "Whenever earnest money is given in a contract of
sale, it shall be considered as part of the price and as proof of the perfection of the contract" (Art. 1482,
Civil Code).

"It is true that an acceptance may contain a request for certain changes in the terms of the offer and yet be a
binding acceptance. 'So long as it is clear that the meaning of the acceptance is positively and unequivocally
to accept the offer, whether such request is granted or not, a contract is formed.' " (Stuart vs. Franklin Life
Ins. Co., 165 Fed. 2nd 965, citing Sec. 79, Williston on Contracts).

Thus, it was held that the vendor's change in a phrase of the offer to purchase, which change does not
essentially change the terms of the offer, does not amount to a rejection of the offer and the tender of a
counter-offer (Stuart vs. Franklin Life Ins. Co., supra).

The instant case is not governed by the rulings laid down in Beaumont vs. Prieto, 41 Phil. 670, 985, 63 L.
Ed. 770, and Zayco vs. Serra, 44 Phil. 326. In those two cases the acceptance radically altered the offer and,
consequently, there was no meeting of the minds of the parties.

Thus, in the Zayco case, Salvador Serra offered to sell to Lorenzo Zayco his sugar central for P1,000,000 on
condition that the price be paid in cash, or, if not paid in cash, the price would be payable within three years
provided security is given for the payment of the balance within three years with interest. Zayco, instead of
unconditionally accepting those terms, countered that he was going to make a down payment of P100,000,
that Serra's mortgage obligation to the Philippine National Bank of P600,000 could be transferred to Zayco's
account and that he (plaintiff) would give a bond to secure the payment of the balance of the price. It was
held that the acceptance was conditional or was a counter-offer which had to be accepted by Serra. There
was no such acceptance. Serra revoked his offer. Hence, there was no perfected contract.

In the Beaumont case, Benito Valdes offered to sell to W Borck the Nagtahan Hacienda owned by Benito
Legarda, who had empowered Valdes to sell it. Borck was given three months from December 4, 1911 to
buy the hacienda for P307,000. On January 17, 1912 Borck wrote to Valdes, offering to purchase the
hacienda for P307,000 payable on May 1, 1912. No reply was made to that letter. Borck wrote other letters
modifying his proposal. Legarda refused to convey the property.

It was held that Borck's January 17th letter plainly departed from the terms of the offer as to the time of
payment and was a counter-offer which amounted to a rejection of Valdes' original offer. A subsequent
unconditional acceptance could not revive that offer.

The instant case is different from Laudico and Harden vs. Arias Rodriguez, 43 Phil. 270 where the written
offer to sell was revoked by the offer or before the offeree's acceptance came to the offeror's knowledge.

Appellants' next contention is that the contract was not perfected because the condition that Bormaheco, Inc.
would acquire the Nassco land within forty-five days from February 12, 1964 or on or before March 28,
1964 was not fulfilled. This contention is tied up with the following letter of Bormaheco, Inc. (Exh. F):

BORMAHECO, INC.

8
March 30, 1964

Villonco Realty Company

V.R.C. Building

219 Buendia Ave.,

Makati, Rizal

Gentlemen:

We are returning herewith your earnest money together with interest thereon at 10% per annum. Please be
informed that despite the lapse of the 45 days from February 12, 1964 there is no certainty yet for us to
acquire a substitute property, hence the return of the earnest money as agreed upon.

Very truly yours,

SGD. FRANCISCO N. CERVANTES

President

Encl.: P.N.B. Check No. 112994 J

P.N.B. Check No. 112996J

That contention is predicated on the erroneous assumption that Bormaheco, Inc. was to acquire the Nassco
land within forty-five days or on or before March 28, 1964.

The trial court ruled that the forty-five-day period was merely an estimate or a forecast of how long it would
take Bormaheco, Inc. to acquire the Nassco property and it was not "a condition or a deadline set for the
defendant corporation to decide whether or not to go through with the sale of its Buendia property".

The record does not support the theory of Bormaheco, Inc. and the Cervantes spouses that the forty-five-day
period was the time within which (a) the Nassco property and two Pasong Tamo lots should be acquired, (b)
when Cervantes would secure his wife's consent to the sale of the three lots and (c) when Bormaheco, Inc.
had to decide what to do with the DBP encumbrance.

Cervantes in paragraph 3 of his offer of February 12, 1964 stated that the sale of the Buendia lots would be
consummated after he had consummated the purchase of the Nassco property. Then, in paragraph 5 of the
same offer he stated "that final negotiations on both properties can be definitely known after forty-five days"
(See Exh. B).

It is deducible from the tenor of those statements that the consummation of the sale of the Buendia lots to
Villonco Realty Company was conditioned on Bormaheco's acquisition of the Nassco land. But it was not
spelled out that such acquisition should be effected within forty-five days from February 12, 1964. Had it
been Cervantes' intention that the forty-five days would be the period within which the Nassco land should
be acquired by Bormaheco, then he would have specified that period in paragraph 3 of his offer so that
paragraph would read in this wise: "That this sale is to be consummated only after I shall have consummated
my purchase of another property located at Sta. Ana, Manila within forty-five days from the date hereof ."
He could have also specified that period in his "conforme" to Villonco's counter-offer of March 4, 1964
(Exh. D) so that instead of merely stating "that this sale shall be subject to favorable consummation of a
9
property in Sta. Ana we are negotiating" he could have said: "That this sale shall be subject to favorable
consummation within forty-five days from February 12, 1964 of a property in Sta. Ana we are negotiating".

No such specification was made. The term of forty-five days was not a part of the condition that the Nassco
property should be acquired. It is clear that the statement "that final negotiations on both property can be
definitely known after 45 days" does not and cannot mean that Bormaheco, Inc. should acquire the Nassco
property within forty-five days from February 12, 1964 as pretended by Cervantes. It is simply a surmise
that after forty-five days (in fact when the forty-five day period should be computed is not clear) it would be
known whether Bormaheco, Inc. would be able to acquire the Nassco property and whether it would be able
to sell the Buendia property. That aforementioned paragraph 5 does not even specify how long after the
forty-five days the outcome of the final negotiations would be known.

It is interesting to note that in paragraph 6 of Bormaheco's answer to the amended complaint, which answer
was verified by Cervantes, it was alleged that Cervantes accepted Villonco's revised counter-offer of March
4, 1964 subject to the condition that "the final negotiations (acceptance) will have to be made by defendant
within 45 days from said acceptance" (31 Record on Appeal). If that were so, then the consummation of
Bormaheco's purchase of the Nassco property would be made within forty-five days from March 4, 1964.

What makes Bormaheco's stand more confusing and untenable is that in its three answers it invariably
articulated the incoherent and vague affirmative defense that its acceptance of Villonco's revised counter-
offer was conditioned on the circumstance "that final acceptance or not shall be made after 45 days"
whatever that means. That affirmative defense is inconsistent with the other aforequoted incoherent
statement in its third answer that "the final negotiations (acceptance) will have to be made by defendant
within 45 days from said acceptance" (31 Record on Appeal).1äwphï1.ñët

Thus, Bormaheco's three answers and paragraph 5 of his offer of February 12, 1964 do not sustain at all its
theory that the Nassco property should be acquired on or before March 28, 1964. Its rescission or revocation
of its acceptance cannot be anchored on that theory which, as articulated in its pleadings, is quite equivocal
and unclear.

It should be underscored that the condition that Bormaheco, Inc. should acquire the Nassco property was
fulfilled. As admitted by the appellants, the Nassco property was conveyed to Bormaheco, Inc. on June 26,
1964. As early as January 17, 1964 the property was awarded to Bormaheco, Inc. as the highest bidder. On
February 18, 1964 the Nassco Board authorized its General Manager to sell the property to Bormaheco, Inc.
(Exh. H). The Economic Coordinator approved the award on March 24, 1964. It is reasonable to assume that
had Cervantes been more assiduous in following up the transaction, the Nassco property could have been
transferred to Bormaheco, Inc. on or before March 28, 1964, the supposed last day of the forty-five-day
period.

The appellants, in their fifth assignment of error, argue that Bormaheco, Inc. cannot be required to sell the
three lots in question because they are conjugal properties of the Cervantes spouses. They aver that
Cervantes in dealing with the Villonco brothers acted as president of Bormaheco, Inc. and not in his
individual capacity and, therefore, he did not bind the conjugal partnership nor Mrs. Cervantes who was
allegedly opposed to the sale.

Those arguments are not sustainable. It should be remembered that Cervantes, in rescinding the contract of
sale and in returning the earnest money, cited as an excuse the circumstance that there was no certainty in
Bormaheco's acquisition of the Nassco property (Exh. F and Annex 1). He did not say that Mrs. Cervantes
was opposed to the sale of the three lots. He did not tell Villonco Realty Company that he could not bind the
10
conjugal partnership. In truth, he concealed the fact that the three lots were registered "in the name of
FRANCISCO CERVANTES, Filipino, of legal age, married to Rosario P. Navarro, as owner thereof in fee
simple". He certainly led the Villonco brothers to believe that as president of Bormaheco, Inc. he could
dispose of the said lots. He inveigled the Villoncos into believing that he had untrammelled control of
Bormaheco, Inc., that Bormaheco, Inc. owned the lots and that he was invested with adequate authority to
sell the same.

Thus, in Bormaheco's offer of February 12, 1964, Cervantes first identified the three lots as "our property"
which "we are offering to sell ..." (Opening paragraph and par. 1 of Exh. B). Whether the prounoun "we"
refers to himself and his wife or to Bormaheco, Inc. is not clear. Then, in paragraphs 3 and 4 of the offer, he
used the first person and said: "I shall have consummated my purchase" of the Nassco property; "... my
negotiations with said property" and "I will return to you your deposit". Those expressions conveyed the
impression and generated the belief that the Villoncos did not have to deal with Mrs. Cervantes nor with any
other official of Bormaheco, Inc.

The pleadings disclose that Bormaheco, Inc. and Cervantes deliberately and studiously avoided making the
allegation that Cervantes was not authorized by his wife to sell the three lots or that he acted merely as
president of Bormaheco, Inc. That defense was not interposed so as not to place Cervantes in the ridiculous
position of having acted under false pretenses when he negotiated with the Villoncos for the sale of the three
lots.

Villonco Realty Company, in paragraph 2 of its original complaint, alleged that "on February 12, 1964, after
some prior negotiations, the defendant (Bormaheco, Inc.) made a formal offer to sell to the plaintiff the
property of the said defendant situated at the abovenamed address along Buendia Avenue, Makati, Rizal,
under the terms of the letter-offer, a copy of which is hereto attached as Annex A hereof", now Exhibit B (2
Record on Appeal).

That paragraph 2 was not, repeat, was not denied by Bormaheco, Inc. in its answer dated May 5, 1964. It did
not traverse that paragraph 2. Hence, it was deemed admitted. However, it filed an amended answer dated
May 25, 1964 wherein it denied that it was the owner of the three lots. It revealed that the three lots "belong
and are registered in the names of the spouses Francisco N. Cervantes and Rosario N. Cervantes."

The three answers of Bormaheco, Inc. contain the following affirmative defense:

13. That defendant's insistence to finally decide on the proposed sale of the land in question after 45 days
had not only for its purpose the determination of its acquisition of the said Sta. Ana (Nassco) property
during the said period, but also to negotiate with the actual and registered owner of the parcels of land
covered by T.C.T. Nos. 43530, 43531 and 43532 in question which plaintiff was fully aware that the same
were not in the name of the defendant (sic; Par. 18 of Answer to Amended Complaint, 10, 18 and 34, Record
on Appeal).

In that affirmative defense, Bormaheco, Inc. pretended that it needed forty- five days within which to
acquire the Nassco property and "to negotiate" with the registered owner of the three lots. The absurdity of
that pretension stands out in bold relief when it is borne in mind that the answers of Bormaheco, Inc. were
verified by Cervantes and that the registered owner of the three lots is Cervantes himself. That affirmative
defense means that Cervantes as president of Bormaheco, Inc. needed forty-five days in order to "negotiate"
with himself (Cervantes).

11
The incongruous stance of the Cervantes spouses is also patent in their answer to the amended complaint. In
that answer they disclaimed knowledge or information of certain allegations which were well-known to
Cervantes as president of Bormaheco, Inc. and which were admitted in Bormaheco's three answers that were
verified by Cervantes.

It is significant to note that Bormaheco, Inc. in its three answers, which were verified by Cervantes, never
pleaded as an affirmative defense that Mrs. Cervantes opposed the sale of the three lots or that she did not
authorize her husband to sell those lots. Likewise, it should be noted that in their separate answer the
Cervantes spouses never pleaded as a defense that Mrs. Cervantes was opposed to the sale of three lots or
that Cervantes could not bind the conjugal partnership. The appellants were at first hesitant to make it appear
that Cervantes had committed the skullduggery of trying to sell property which he had no authority to
alienate.

It was only during the trial on May 17, 1965 that Cervantes declared on the witness stand that his wife was
opposed to the sale of the three lots, a defense which, as already stated, was never interposed in the three
answers of Bormaheco, Inc. and in the separate answer of the Cervantes spouses. That same viewpoint was
adopted in defendants' motion for reconsideration dated November 20, 1965.

But that defense must have been an afterthought or was evolved post litem motam since it was never
disclosed in Cervantes' letter of rescission and in his letter to Miss Tagle (Exh. F and Annex 1). Moreover,
Mrs. Cervantes did not testify at the trial to fortify that defense which had already been waived for not
having been pleaded (See sec. 2, Rule 9, Rules of Court).

Taking into account the situation of Cervantes vis-a-vis Bormaheco, Inc. and his wife and the fact that the
three lots were entirely occupied by Bormaheco's building, machinery and equipment and were mortgaged
to the DBP as security for its obligation, and considering that appellants' vague affirmative defenses do not
include Mrs. Cervantes' alleged opposition to the sale, the plea that Cervantes had no authority to sell the
lots strains the rivets of credibility (Cf. Papa and Delgado vs. Montenegro, 54 Phil. 331; Riobo vs.
Hontiveros, 21 Phil. 31).

"Obligations arising from contracts have the force of law between the contracting parties and should be
complied with in good faith" (Art. 1159, Civil Code). Inasmuch as the sale was perfected and even partly
executed, Bormaheco, Inc., and the Cervantes spouses, as a matter of justice and good faith, are bound to
comply with their contractual commitments.

Parenthetically, it may be observed that much misunderstanding could have been avoided had the broker and
the buyer taken the trouble of making some research in the Registry of Deeds and availing themselves of the
services of a competent lawyer in drafting the contract to sell.

Bormaheco, Inc. and the Cervantes spouses in their sixth assignment of error assail the trial court's award to
Villonco Realty Company of consequential damage amounting to ten thousand pesos monthly from March
24, 1964 (when the Economic Coordinator approved the award of the Nassco property to Bormaheco, Inc.)
up to the consummation of the sale. The award was based on paragraph 18 of the stipulation of facts wherein
Villonco Realty Company "submits that the delay in the consummation of the sale" has caused it to suffer
the aforementioned damages.

The appellants contend that statement in the stipulation of facts simply means that Villonco Realty Company
speculates that it has suffered damages but it does not mean that the parties have agreed that Villonco Realty
Company is entitled to those damages.
12
Appellants' contention is correct. As rightly observed by their counsel, the damages in question were not
specifically pleaded and proven and were "clearly conjectural and speculative".

However, appellants' view in their seventh assignment of error that the trial court erred in ordering
Bormaheco, Inc. to pay Villonco Realty Company the sum of twenty thousand pesos as attorney's fees is not
tenable. Under the facts of the case, it is evident that Bormaheco, Inc. acted in gross and evident bad faith in
refusing to satisfy the valid and just demand of Villonco Realty Company for specific performance. It
compelled Villonco Realty Company to incure expenses to protect its interest. Moreover, this is a case
where it is just and equitable that the plaintiff should recover attorney's fees (Art. 2208, Civil Code).

The appellants in their eighth assignment of error impugn the trial court's adjudication of forty-two thousand
pesos as three percent broker's commission to Miss Tagle. They allege that there is no evidence that
Bormaheco, Inc. engaged her services as a broker in the projected sale of the three lots and the
improvements thereon. That allegation is refuted by paragraph 3 of the stipulation of facts and by the
documentary evidence. It was stipulated that Miss Tagle intervened in the negotiations for the sale of the
three lots. Cervantes in his original offer of February 12, 1964 apprised Villonco Realty Company that the
earnest money should be delivered to Miss Tagle, the bearer of the letter-offer. See also Exhibit G and
Annex I of the stipulation of facts.

We hold that the trial court did not err in adjudging that Bormaheco, Inc. should pay Miss Tagle her three
percent commission.

WHEREFORE, the trial court's decision is modified as follows:

1. Within ten (10) days from the date the defendants-appellants receive notice from the clerk of the lower
court that the records of this case have been received from this Court, the spouses Francisco N. Cervantes
and Rosario P. Navarra-Cervantes should execute a deed conveying to Bormaheco, Inc. their three lots
covered by Transfer Certificate of Title Nos. 43530, 43531 and 43532 of the Registry of Deeds of Rizal.

2. Within five (5) days from the execution of such deed of conveyance, Bormaheco, Inc. should execute in
favor of Villonco Realty Company, V. R. C. Building, 219 Buendia Avenue, Makati, Rizal a registerable
deed of sale for the said three lots and all the improvements thereon, free from all lien and encumbrances, at
the price of four hundred pesos per square meter, deducting from the total purchase price the sum of
P100,000 previously paid by Villonco Realty Company to Bormaheco, Inc.

3. Upon the execution of such deed of sale, Villonco Realty Company is obligated to pay Bormaheco, Inc.
the balance of the price in the sum of one million three hundred thousand pesos (P1,300,000).

4. Bormaheco, Inc. is ordered (a) to pay Villonco Realty Company twenty thousand pesos (P20,000) as
attorney's fees and (b) to pay Edith Perez de Tagle the sum of forty-two thousand pesos (P42,000) as
commission. Costs against the defendants-appellants.

SO ORDERED.

Makalintal, C.J, Castro. Fernando, Makasiar, Antonio, Esguerra, Muñoz Palma, Concepcion Jr. and
Martin, JJ., concur.

Teehankee, J., is on leave.

13
Villonco v Bormaheco
G.R. No. L-26872 July 25, 1975
VILLONCO REALTY COMPANY, plaintiff-appellee and EDITH PEREZ DE TAGLE, intervenor-
appellee, vs. BORMAHECO, INC., FRANCISCO N. CERVANTES and ROSARIO N. CERVANTES,
defendants-appellants.

FACTS:
Francisco Cervantes (president of Bormaheco) and his wife, Rosario, are the owners of Lots 3, 15 and 16 in
Buendia Avenue Makati, which were mortgaged to DBP as security for a loan of 441k. The mortgage debt
was fully paid on July 10, 1969.

In 1964, there were negotiations for the sale of said lots and improvements between Romeo Villonco (of
Villonco Realty Co) and Bormaheco Inc, represented by Cervantes. In the course of the negotiations, the
brothers Romeo and Teofilo Villonco conferred with Cervantes in his office to discuss the price and terms of
sale. Later, Cervantes went to see Villonco for the same reason until some agreement was arrived at.

Bormaheco (through Cervantes) made a written offer to Villonco for the sale of the property with the
terms of sale:
1. Selling price of P400 per sqm,
2. That a deposit of 100k must be placed as earnest money on the purchase of the property which will
become part payment of the property in the event that the sale is consummated
3. That the sale is to be consummated only after I shall have also consummated my purchase of another
property located at Sta. Ana Manila (Punta property),
4. That if the negotiations with said property will not be consummated by reason beyond my control, I
will return to you your deposit of 100k and the sale of my property to you will not also be consummated,
and
5. That final negotiations on both properties can be definitely known after 45 days

Villonco Realty made a counter-offer, confirming the previous terms, with the deviation: This sale shall be
cancelled, only if your deal with another property in Sta. Ana shall not be consummated and in such case,
the P100,000-00 earnest money will be returned to us with a 10% interest p.a. However, if our deal with you
is finalized, said P100,000.00 will become as part payment for the purchase of your property without
interest. Xxx If the terms are acceptable to you, kindly sign your conformity. Enclosed is a check for 100k as
earnest money.

The check was delivered to Bormaheco and was received by Cervantes. Cervantes signed and wrote on the
letter: That this sale shall be subject to favorable consummation of a property in Sta. Ana we are negotiating.

Then unexpectedly, in a letter dated 26 days after the signing of the contract of sale, Cervantes returned
the earnest money, with interest amounting to 694.24 (10% p.a). He cited as an excuse that there is no
certainty yet for the acquisition of the Punta property (after 45 days). Villonco refused to accept the
letter and checks of Borhameco. Cervantes sent them by registered mail. When he rescinded the contract,
he was already aware that the Punta property had been awarded to Borhameco.

Villonco Realty (through their authorized broker Edith de Tagle) does not agree with the rescission of sale,
as per their dealings. On the other hand, Cervantes alleged that the 45 day period had already expired and
the sale to Bormaheco of the Punta property had not been consummated. In essence, Cervantes
14
contends that no contract of sale was perfected because Cervantes made a supposedly qualified acceptance
of the offer, which amounted to a counter offer, and because the condition that Bormaheco would acquire
the Punta land within the 45-day period was not fulfilled.

ISSUE: Was there a perfected contract of sale? YES

HELD:
Bormaheco's acceptance of Villonco Realty Company's offer to purchase the Buendia Avenue property, as
shown in Teofilo Villonco's letter, indubitably proves that there was a meeting of minds upon the subject
matter and consideration of the sale. Therefore, on that date the sale was perfected. Not only that
Bormaheco's acceptance of the part payment of one hundred ,thousand pesos shows that the sale was
conditionally consummated or partly executed subject to the purchase by Bormaheco, Inc. of the Punta
property. The nonconsummation of that purchase would be a negative resolutory condition.

As to Bormaheco’s acquisition of the Punta property:

Bormaheco’s bid for the Punta property was already accepted by Nassco (owner), which had authorized its
General Manager to sign the Deed of Sale. What was necessary only was the approval of the sale by the
Economic Coordinator and a request for that approval was already pending in the office of that functionary.

As to Bormaheco’s contention that there was no perfection of sale:

That contention is not well-taken. It should be stressed that there is no evidence as to what changes were
made by Cervantes in Villonco's revised offer. And there is no evidence that Villonco Realty Company did
not assent to the supposed changes and that such assent was never made known to Cervantes.

What the record reveals is that the broker, Miss Tagle, acted as intermediary between the parties. It is safe to
assume that the alleged changes or qualifications made by Cervantes were approved by Villonco Realty
Company and that such approval was duly communicated to Cervantes or Bormaheco, Inc. by the broker as
shown by the fact that Villonco Realty Company paid, and Bormaheco, Inc. accepted, the sum of P100,000
as earnest money or down payment. That crucial fact implies that Cervantes was aware that Villonco Realty
Company had accepted the modifications which he had made in Villonco's counter-offer. Had Villonco
Realty Company not assented to those insertions and annotations, then it would have stopped payment on its
check for P100,000. The fact that Villonco Realty Company allowed its check to be cashed by Bormaheco,
Inc. signifies that the company was in conformity with the changes made by Cervantes and that Bormaheco,
Inc. was aware of that conformity. Had those insertions not been binding, then Bormaheco, Inc. would not
have paid interest at the rate of ten percent per annum, on the earnest money of P100,000.

The truth is that the alleged changes or qualifications in the revised counter — offer are not material or are
mere clarifications of what the parties had previously agreed upon.

Cervantes allegedly crossed out the word "Nassco" in Villonco's revised counter-offer and substituted for it
the word "another" so that the original phrase, "Nassco's property in Sta. Ana", was made to read as
"another property in Sta. Ana". That change is trivial. What Cervantes did was merely to adhere to the
wording of Bormaheco's original offer which mentions "another property located at Sta. Ana."

Similarly, Cervantes' alleged insertion of the letters "PA" ( per annum) after the word "interest" in that
same paragraph 3 of the revised counter-offer (Exh. D) could not be categorized as a major alteration of that

15
counter-offer that prevented a meeting of the minds of the parties. It was understood that the parties had
contemplated a rate of ten percent per annum since ten percent a month or semi-annually would be usurious.

Appellants Bormaheco, Inc. and Cervantes further contend that Cervantes, in clarifying in the voucher for
the earnest money of P100,000 that Bormaheco's acceptance thereof was subject to the terms and conditions
embodied in Bormaheco's letter of February 12, 1964 and your (Villonco's) letter of March 4, 1964" made
Bormaheco's acceptance "qualified and conditional".

That contention is not correct. There is no incompatibility between Bormaheco's offer of February 12, 1964
(Exh. B) and Villonco's counter-offer of March 4, 1964 (Exh. D). The revised counter-offer merely
amplified Bormaheco's original offer.

The controlling fact is that there was agreement between the parties on the subject matter, the price
and the mode of payment and that part of the price was paid. "Whenever earnest money is given in a
contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract" (Art.
1482, Civil Code).

As to the 45-day period of acquisition of Punta property;

The term of forty-five days was not a part of the condition that the Nassco property should be acquired. It is
clear that the statement "that final negotiations on both property can be definitely known after 45 days" does
not and cannot mean that Bormaheco, Inc. should acquire the Nassco property within forty-five days from
February 12, 1964 as pretended by Cervantes. It is simply a surmise that after forty-five days (in fact when
the forty-five day period should be computed is not clear) it would be known whether Bormaheco, Inc.
would be able to acquire the Nassco property and whether it would be able to sell the Buendia property.

Summary from the book:

There was a perfected contract of sale from the exchange of correspondences, even if there was a correction
or modification contained in the acceptance. The changes were not substantial, but merely clarificatory.
Such is corroborated also by the fact that upon receipt of the check covering the earnest money, Bormaheco
had encashed the same

16
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 199648               January 28, 2015

FIRST OPTIMA REALTY CORPORATION, Petitioner,

vs.
SECURITRON SECURITY SERVICES, INC., Respondent.

DECISION

DEL CASTILLO, J.:

In a potential sale transaction, the prior payment of earnest money even before the property owner can agree to sell his
property is irregular, and cannot be used to bind the owner to the obligations of a seller under an otherwise perfected
contract of sale; to cite a well-worn cliche, the carriage cannot be placed before the horse. The property owner-prospective
seller may not be legally obliged to enter into a sale with a prospective buyer through the latter's employment of
questionable practices which prevent the owner from freely giving his consent to the transaction; this constitutes a palpable
transgression of the prospective seller's rights of ownership over his property, an anomaly which the Court will certainly not
condone.

This Petition for Review on Certiorari  seeks to set aside: 1) the September 30, 2011 Decision  of the Court of Appeals (CA)
1 2

in CA-G.R. CV No. 93715 affirming the February 16, 2009 Decision' of the Regional Trial Court (RTC) of Pasay City,
Branch 115 in Civil Case No. 06-0492 CFM; and 2) the CA’s December 9, 2011 Resolution  denying the herein petitioner’s
4

Motion for Reconsideration  of the assailed judgment.

5

Factual Antecedents

Petitioner First Optima Realty Corporation is a domestic corporation engaged in the real estate business. It is the registered
owner of a 256-square meter parcel of land with improvements located in Pasay City, covered by Transfer Certificate of
Title No. 125318 (the subject property).  Respondent Securitron Security Services, Inc., on the other hand, is a domestic
6

corporation with offices located beside the subject property.

Looking to expand its business and add toits existing offices, respondent – through its General Manager, Antonio Eleazar
(Eleazar) – sent a December 9, 2004 Letter  addressed to petitioner – through its Executive Vice-President, Carolina T.
7

Young (Young) – offering to purchase the subject property at ₱6,000.00 per square meter. A series of telephone calls
ensued, but only between Eleazar and Young’s secretary;  Eleazar likewise personally negotiated with a certain Maria
8

Remoso (Remoso), who was an employee of petitioner.  At this point, Eleazar was unable to personally negotiate with
9

Young or the petitioner’s board of directors.

Sometime thereafter, Eleazar personally went to petitioner’s office offering to pay for the subject property in cash, which he
already brought with him. However, Young declined to accept payment, saying that she still needed to secure her sister’s
advice on the matter.  She likewise informed Eleazar that prior approval of petitioner’s Board of Directors was required for
10

the transaction, to which remark Eleazar replied that respondent shall instead await such approval. 11

On February 4, 2005, respondent sent a Letter  of even date to petitioner. It was accompanied by Philippine National Bank
12

Check No. 24677 (the subject check), issued for ₱100,000.00 and made payable to petitioner. The letter states thus:

Gentlemen:

As agreed upon, we are making a deposit of ONE HUNDRED THOUSAND PESOS (Php 100,000.00) as earnest money for
your property at the corner of Layug St., & Lim-An St., Pasay City as per TCT No. 125318 with an area of 256 sq. m. at
6,000.00/ sq. m. for a total of ONE MILLION FIVE HUNDRED THIRTY SIX THOUSAND PESOS (Php 1,536,000.00).

Full payment upon clearing of the tenants at said property and signing of the Deed of Sale.
17
(signed)
ANTONIO S. ELEAZAR 13

Despite the delicate nature of the matter and large amount involved, respondent did not deliver the letter and check directly
to Young or her office; instead, they were coursed through an ordinary receiving clerk/receptionist of the petitioner, who
thus received the same and therefor issued and signed Provisional Receipt No. 33430.  The said receipt reads:
14

Received from x x x Antonio Eleazar x x x the sum of Pesos One Hundred Thousand x x x

IN PAYMENT OF THE FOLLOWING x x x

Earnest money or Partial payment of

Pasay Property Layug & Lim-an St. x x x.

Note: This is issued to transactions not

yet cleared but subsequently an OfficialReceipt will be issued. x x x 15

The check was eventually deposited with and credited to petitioner’s bank account.

Thereafter, respondent through counsel demanded in writing that petitioner proceed with the sale of the property.  In a 16

March 3, 2006 Letter  addressed to respondent’s counsel, petitioner wrote back:

17

Dear Atty. De Jesus:

Anent your letter dated January 16, 2006 received on February 20, 2006, please be informed of the following:

1. It was your client SECURITRON SECURITY SERVICES, INC. represented by Mr. Antonio Eleazar
who offered to buy our property located at corner Layug and Lim-An St., Pasay City;

2. It tendered an earnest money despite the fact that we are still undecided to sell the said property;

3. Our Board of Directors failed to pass a resolution to date whether it agrees to sell the property;

4. We have no Contract for the earnest money nor Contract to Sell the said property with your client;

Considering therefore the above as well as due to haste and demands which we feel [are forms] of intimidation and
harassment, we regret to inform you that we are now incline (sic) not to accept your offer to buy our property. Please inform
your client to coordinate with us for the refund of this (sic) money.

Very truly yours,

(signed)
CAROLINA T. YOUNG
Executive Vice[-]President 18

Ruling of the Regional Trial Court of Pasay City

On April 18, 2006, respondent filed with the Pasay RTC a civil case against petitioner for specific performance with
damages to compel the latter to consummate the supposed sale of the subject property. Docketed as Civil Case No. 06-0492
CFM and assigned to Branch 115 of the Pasay RTC, the Complaint  is predicated on the claim that since a perfected
19

contract of sale arose between the parties after negotiations were conducted and respondent paid the ₱100,000.00 supposed
earnest money – which petitioner accepted, the latter should be compelled to sell the subject property to the former. Thus,
respondent prayed that petitioner be ordered to comply with its obligation as seller, accept the balance of the purchase price,
and execute the corresponding deed of sale in respondent’s favor; and that petitioner be made to pay ₱200,000.00 damages
for its breach and delay in the performance of its obligations, ₱200,000.00 by way of attorney's fees, and costs of suit.

18
In its Answer with Compulsory Counterclaim,  petitioner argued that it never agreed to sell the subject property; that its
20

board of directors did not authorize the sale thereof to respondent, as no corresponding board resolution to such effect was
issued; that the respondent’s ₱100,000.00 check payment cannot be considered as earnest money for the subject property,
since said payment was merely coursed through petitioner’s receiving clerk, who was forced to accept the same; and that
respondent was simply motivated by a desire to acquire the subject property at any cost. Thus, petitioner prayed for the
dismissal of the case and, by way of counterclaim, it sought the payment of moral damages in the amount of ₱200,000.00;
exemplary damages in the amount of ₱100,000.00; and attorney’s fees and costs of suit.

In a Reply,  respondent countered that authorization by petitioner’s Board of Directors was not necessary since it is a real
21

estate corporation principally engaged in the buying and selling of real property; that respondent did not force nor intimidate
petitioner’s receiving clerk into accepting the February 4, 2005 letter and check for ₱100,000.00; that petitioner’s
acceptance of the check and its failure – for more than a year – to return respondent’s payment amounts to estoppel and a
ratification of the sale; and that petitioner is not entitled to its counterclaim.

After due proceedings were taken, the Pasay RTC issued its Decision dated February 16, 2009, decreeing as follows:

WHEREFORE, defendant First Optima Realty Corporation is directed to comply with its obligation by accepting the
remaining balance of One Million Five Hundred Thirty-Six Thousand Pesos and Ninety-Nine Centavos (₱1,536,000.99),
and executing the corresponding deed of sale in favor of the plaintiff Securitron Security Services, Inc. over the subject
parcel of land.

No costs.

SO ORDERED. 22

In ruling for the respondent, the trial court held that petitioner’s acceptance of ₱100,000.00 earnest money indicated the
existence of a perfected contract of sale between the parties; that there is no showing that when respondent gave the
February 4, 2005 letter and check to petitioner’s receiving clerk, the latter was harassed or forced to accept the same; and
that for the sale of the subject property, no resolution of petitioner’s board of directors was required since Young was "free
to represent" the corporation in negotiating with respondent for the sale thereof. Ruling of the Court of Appeals

Petitioner filed an appeal with the CA. Docketed as CA-G.R. CV No. 93715, the appeal made out a case that no earnest
money can be considered to have been paid to petitioner as the supposed payment was received by a mere receiving clerk,
who was not authorized to accept the same; that the required board of directors resolution authorizing the sale of corporate
assets cannot be dispensed with in the case of petitioner; that whatever negotiations were held between the parties only
concerned the possible sale, not the sale itself, of the subject property; that without the written authority of petitioner’s
board of directors, Young cannot enter into a sale of its corporate property; and finally, that there was no meeting of the
minds between the parties in the first place.

On September 30, 2011, the CA issued the assailed Decision affirming the trial court’s February 16, 2009Decision,
pronouncing thus:

Article 1318 of the Civil Code declares that no contract exists unless the following requisites concur: (1) consent of the
contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation established.

A careful perusal of the records of the case show[s] that there was indeed a negotiation between the parties as regards the
sale of the subject property, their disagreement lies on whether they have arrived on an agreement regarding said sale.
Plaintiff-appellee avers that the parties have already agreed on the sale and the price for it and the payment of earnest money
and the remaining balance upon clearing of the property of unwanted tenants. Defendant-appellant on the other hand
disputes the same and insists that there was no concrete agreement between the parties.

Upon a careful consideration of the arguments of the parties and the records of the case, we are more inclined to sustain the
arguments of the plaintiff-appellee and affirm the findings of the trial court that there was indeed a perfected contract of sale
between the parties. The following instances militate against the claim of the defendant-appellant: First. The letter of the
plaintiff-appellee dated February 4, 2005 reiterating their agreement as to the sale of the realty for the consideration of Php
1,536,000.00 was not disputed nor replied to by the defendant-appellant, the said letter also provides for the payment of the
earnest money of Php 100,000.00 and the full payment upon the clearing of the property of unwanted tenants, if the
defendant-appellant did not really agree on the sale of the property it could have easily replied to the said letter informing
the plaintiff-appellee that it is not selling the property or that the matter will be decided first by the board of directors,

19
defendant-appellant’s silence or inaction on said letter shows its conformity or consent thereto; Second. In addition to the
aforementioned letter, defendant-appellant’s acceptance of the earnest money and the issuance of a provisional receipt
clearly shows that there was indeed an agreement between the parties and we do not subscribe to the argument of the
defendant-appellant that the check was merely forced upon its employee and the contents of the receipt was just dictated by
the plaintiff-appellee’s employee because common sense dictates that a person would not issue a receipt for a check with a
huge amount if she does not know what that is for and similarly would not issue [a] receipt which would bind her employer
if she does not have prior instructions to do [so] from her superiors; Third. The said check for earnest money was deposited
in the bank by defendant-appellant and not until after one year did it offer to return the same. Defendant-appellant cannot
claim lack of knowledge of the payment of the check since there was a letter for it, and it is just incredible that a big amount
of money was deposited in [its] account [without knowing] about it [or] investigat[ing] what [it was] for. We are more
inclined to believe that their inaction for more than one year on the earnest money paid was due to the fact that after the
payment of earnest money the place should be cleared of unwanted tenants before the full amount of the purchase price will
be paid as agreed upon as shown in the letter sent by the plaintiff-appellee.

As stated above the presence of defendant-appellant’s consent and, corollarily, the existence of a perfected contract between
the parties are evidenced by the payment and receipt of Php 100,000.00 as earnest money by the contracting parties’ x x x.
Under the law on sales, specifically Article 1482 of the Civil Code, it provides that whenever earnest money is given in a
contract of sale, it shall be considered as part of the price and proof of the perfection of the contract. Although the
presumption is not conclusive, as the parties may treat the earnest money differently, there is nothing alleged in the present
case that would give rise to a contrary presumption.

We also do not find merit in the contention of the defendant-appellant that there is a need for a board resolution for them to
sell the subject property since it is a corporation, a juridical entity which acts only thru the board of directors. While we
agree that said rule is correct, we must also point out that said rule is the general rule for all corporations [but] a corporation
[whose main business is buying and selling real estate] like herein defendant-appellant, is not required to have a board
resolution for the sale of the realty in the ordinary course of business, thus defendant-appellant’s claim deserves scant
consideration.

Furthermore, the High Court has held that "a corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that the authority to do so has been conferred upon him, and this includes
powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are
incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with
the officer or agent to believe that it was conferred."

In the case at bench, it is not disputed and in fact was admitted by the defendant-appellant that Ms. Young, the Executive
Vice-President was authorized to negotiate for the possible sale of the subject parcel of land. Therefore, Ms. Young can
represent and bind defendant-appellant in the transaction.

Moreover, plaintiff-appellee can assume that Ms. Young, by virtue of her position, was authorized to sell the property of the
corporation. Selling of realty is not foreign to [an] executive vice[-]president’s function, and the real estate sale was shown
to be a normal business activity of defendant-appellant since its primary business is the buy and sell of real estate.
Unmistakably, its Executive Vice-President is cloaked with actual or apparent authority to buy or sell real property, an
activity which falls within the scope of her general authority.

Furthermore, assuming arguendo that a board resolution was indeed needed for the sale of the subject property, the
defendant-appellant is estopped from raising it now since, [it] did not inform the plaintiff-appellee of the same, and the
latter deal (sic) with them in good faith. Also it must be stressed that the plaintiff-appellee negotiated with one of the top
officer (sic) of the company thus, any requirement on the said sale must have been known to Ms. Young and she should
have informed the plaintiff-appellee of the same.

In view of the foregoing we do not find any reason to deviate from the findings of the trial court, the parties entered into the
contract freely, thus they must perform their obligation faithfully. Defendant-appellant’s unjustified refusal to perform its
part of the agreement constitutes bad faith and the court will not tolerate the same.

WHEREFORE, premises considered, the Decision of the Regional Trial Court of Pasay City Branch 115, in Civil Case No.
06-0492 CFM is hereby AFFIRMED.

SO ORDERED. 23

20
Petitioner moved for reconsideration,  but in a December 9, 2011 Resolution, the CA held its ground. Hence, the present
24

Petition.

Issues

In an October 9,2013 Resolution,  this Court resolved to give due course to the Petition, which raises the following issues:
25

THE HONORABLE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THE
MONEY RESPONDENT DELIVERED TO PETITIONER WAS EARNEST MONEY THEREBY PROVIDING A
PERFECTED CONTRACT OF SALE.

II

THE HONORABLE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THE TIME
THAT LAPSED IN RETURNING THE MONEY AND IN REPLYING TO THE LETTER IS PROOF OF ACCEPTANCE
OF EARNEST MONEY.

III

THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND GRAVE ERROR WHEN IT IGNOREDTHE
RESERVATION IN THE PROVISIONAL RECEIPT – "Note: This is issued to transactions not yet cleared but
subsequently an Official Receipt will be issued." 26

Petitioner’s Arguments

In its Petition and Reply  seeking to reverse and set aside the assailed CA dispositions and in effect to dismiss Civil Case
27

No. 06-0492 CFM, petitioner argues that respondent failed to prove its case that a contract of sale was perfected between
the parties. It particularly notes that, contrary to the CA’s ruling, respondent’s delivery of the February 4, 2005 letter and
check; petitioner’s failure to respond to said letter; petitioner’s supposed acceptance of the check by depositing the same in
its account; and its failure to return the same after more than one year from its tender – these circumstances do not at all
prove that a contract of sale was perfected between the parties. It claims that there was never an agreement in the first place
between them concerning the sale of the subject property, much less the payment of earnest money therefor; that during
trial, Eleazar himself admitted that the check was merely a "deposit";  that the February 4, 2005 letter and check were
28

delivered not to Young, but to a mere receiving clerk of petitioner who knew nothing about the supposed transaction and
was simply obliged to accept the same without the prerogative to reject them; that the acceptance of respondent’s supposed
payment was not cleared and was subject to approval and issuance of the corresponding official receipt as noted in
Provisional Receipt No. 33430; that respondent intentionally delivered the letter and check in the manner that it did in order
to bind petitioner to the supposed sale with or without the latter’s consent; that petitioner could not be faulted for receiving
the check and for depositing the same as a matter of operational procedure with respect to checks received in the course of
its day-to-day business.

Petitioner argues that ultimately, it cannot be said that it gave its consent to any transaction with respondent or to the
payment made by the latter. Respondent’s letter and check constitute merely an offer which required petitioner’s acceptance
in order to give rise to a perfected sale; "[o]therwise, a buyer can easily bind any unsuspecting seller to a contract of sale by
merely devising a way that prevents the latter from acting on the communicated offer." 29

Petitioner thus theorizes that since it had no perfected agreement with the respondent, the latter’s check should be treated
not as earnest money, but as mere guarantee, deposit or option money to prevent the prospective seller from backing out
from the sale,  since the payment of any consideration acquires the character of earnest money only after a perfected sale
30

between the parties has been arrived at. 31

Respondent’s Arguments

In its Comment,  respondent counters that petitioner’s case typifies a situation where the seller has had an undue change of
32

mind and desires to escape the legal consequences attendant to a perfected contract of sale. It reiterates the appellate court’s
pronouncements that petitioner’s failure to reply to respondent’s February 4, 2005 letter indicates its consent to the sale; that
its acceptance of the check as earnest money and the issuance of the provisional receipt prove that there is a prior agreement
21
between the parties; that the deposit of the check in petitioner’s account and failure to timely return the money to respondent
militates against petitioner’s claim of lack of knowledge and consent. Rather they indicate petitioner’s decision to sell
subject property as agreed. Respondent adds that contrary to petitioner’s claim, negotiations were in fact held between the
parties after it sent its December 9, 2004 letter-offer, which negotiations precisely culminated in the preparation and
issuance of the February4, 2005 letter; that petitioner’s failure to reply to its February 4, 2005 letter meant that it was
amenable to respondent’s terms; that the issuance of a provisional receipt does not prevent the perfection of the agreement
between the parties, since earnest money was already paid; and that petitioner cannot pretend to be ignorant of respondent’s
check payment, as it involved a large sum of money that was deposited in the former’s bank account.

Our Ruling

The Court grants the Petition. The trial and appellate courts erred materially in deciding the case; they overlooked important
facts that should change the complexion and outcome of the case.

It cannot be denied that there were negotiations between the parties conducted after the respondent’s December 9, 2004
letter-offer and prior to the February 4, 2005 letter. These negotiations culminated in a meeting between Eleazar and Young
whereby the latter declined to enter into an agreement and accept cash payment then being tendered by the former. Instead,
Young informed Eleazar during said meeting that she still had to confer with her sister and petitioner’s board of directors; in
turn, Eleazar told Young that respondent shall await the necessary approval.

Thus, the trial and appellate courts failed to appreciate that respondent’s offer to purchase the subject property was never
accepted by the petitioner at any instance, even after negotiations were held between them. Thus, as between them, there is
no sale to speak of. "When there is merely an offer by one party without acceptance of the other, there is no contract."  To 33

borrow a pronouncement in a previously decided case,

The stages of a contract of sale are: (1) negotiation, starting from the time the prospective contracting parties indicate
interest in the contract to the time the contract is perfected; (2) perfection, which takes place upon the concurrence of the
essential elements of the sale; and (3) consummation, which commences when the parties perform their respective
undertakings under the contract of sale, culminating in the extinguishment of the contract.

In the present case, the parties never got past the negotiation stage. Nothing shows that the parties had agreed on any final
arrangement containing the essential elements of a contract of sale, namely, (1) consent or the meeting of the minds of the
parties; (2) object or subject matter of the contract; and (3) price or consideration of the sale.
34

Respondent’s subsequent sending of the February 4, 2005 letter and check to petitioner – without awaiting the approval of
petitioner’s board of directors and Young’s decision, or without making a new offer – constitutes a mere reiteration of its
original offer which was already rejected previously; thus, petitioner was under no obligation to reply to the February 4,
2005 letter. It would be absurd to require a party to reject the very same offer each and every time it is made; otherwise, a
perfected contract of sale could simply arise from the failure to reject the same offer made for the hundredth time.  Thus,
1âwphi1

said letter cannot be considered as evidence of a perfected sale, which does not exist in the first place; no binding obligation
on the part of the petitioner to sell its property arose as a consequence. The letter made no new offer replacing the first
which was rejected.

Since there is no perfected sale between the parties, respondent had no obligation to make payment through the check; nor
did it possess the right to deliver earnest money to petitioner in order to bind the latter to a sale. As contemplated under Art.
1482 of the Civil Code, "there must first be a perfected contract of sale before we can speak of earnest money."  "Where the
35

parties merely exchanged offers and counter-offers, no contract is perfected since they did not yet give their consent to such
offers. Earnest money applies to a perfected sale." 36

This Court is inclined to accept petitioner’s explanation that since the check was mixed up with all other checks and
correspondence sent to and received by the corporation during the course of its daily operations, Young could not have
timely discovered respondent’s check payment; petitioner’s failure to return the purported earnest money cannot mean that
it agreed to respondent’s offer.

Besides, respondent’s payment of supposed earnest money was made under dubious circumstances and in disregard of
sound business practice and common sense. Indeed, respondent must be faulted for taking such a course of action that is
irregular and extraordinary: common sense and logic dictate that if any payment is made under the supposed sale
transaction, it should have been made directly to Young or coursed directly through her office, since she is the officer
directly responsible for negotiating the sale, as far as respondent is concerned and considering the amount of money

22
involved; no other ranking officer of petitioner can be expected to know of the ongoing talks covering the subject property.
Respondent already knew, from Eleazar’s previous meeting with Young, that it could only effectively deal with her; more
than that, it should know that corporations work only through the proper channels. By acting the way it did – coursing the
February 4, 2005 letter and check through petitioner’s mere receiving clerk or receptionist instead of directly with Young’s
office, respondent placed itself under grave suspicion of putting into effect a premeditated plan to unduly bind petitioner to
its rejected offer, in a manner which it could not achieve through negotiation and employing normal business practices. It
impresses the Court that respondent attempted to secure the consent needed for the sale by depositing part of the purchase
price and under the false pretense that an agreement was already arrived at, even though there was none. Respondent
achieved the desired effect up to this point, but the Court will not be fooled.

Thus, as between respondent’s irregular and improper actions and petitioner’s failure to timely return the ₱100,000.00
purported earnest money, this Court sides with petitioner. In a manner of speaking, respondent cannot fault petitioner for
not making a refund since it is equally to blame for making such payment under false pretenses and irregular circumstances,
and with improper motives. Parties must come to court with clean hands, as it were.

In a potential sale transaction, the prior payment of earnest money even before the property owner can agree to sell his
property is irregular, and cannot be used to bind the owner to the obligations of a seller under an otherwise perfected
contract of sale; to cite a well-worn cliché, the carriage cannot be placed before the horse. The property owner-prospective
seller may not be legally obliged to enter into a sale with a prospective buyer through the latter’s employment of
questionable practices which prevent the owner from freely giving his consent to the transaction; this constitutes a palpable
transgression of the prospective seller’s rights of ownership over his property, an anomaly which the Court will certainly
not condone. An agreement where the prior free consent of one party thereto is withheld or suppressed will be struck down,
and the Court shall always endeavor to protect a property owner’s rights against devious practices that put his property in
danger of being lost or unduly disposed without his prior knowledge or consent. As this ponente has held before, "[t]his
Court cannot presume the existence of a sale of land, absent any direct proof of it."
37

Nor will respondent's supposed payment be 'treated as a deposit or guarantee; its actions will not be dignified and must be
called for what they are: they were done irregularly and with a view to acquiring the subject property against petitioner's
consent.

Finally, since there is nothing in legal contemplation which petitioner must perform particularly for the respondent, it
should follow that Civil Case No. 06-0492 CFM for specific performance with damages is left with no leg. to stand on; it
must be dismissed.

With the foregoing view, there is no need to resolve the other specific issues and arguments raised by the petitioner, as they
do not materially affect the rights and obligations of the parties - the Court having declared that no agreement exists
between them; nor do they have the effect of altering the outcome of the case.

WHEREFORE, the Petition is GRANTED. The September 30, 2011 Decision and December 9, 2011 Resolution of the
Court of Appeals in CA-G.R. CV No. 93715, as well as the February 16, 2009 Decision of the Regional Trial Court of
Pasay City, Branch 115 in Civil Case No. 06-0492 CFM are REVERSED and SET ASIDE. Civil Case No. 06-0492 CFM is
ordered DISMISSED. , Petitioner First Optima Realty Corporation is ordered to REFUND the amount of ₱100,000.00 to
respondent Securitron Security Services, Inc. without interest, unless petitioner has done so during the course of the
proceedings.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

23
G.R. No. 154156               August 31, 2006

JMA HOUSE INCORPORATED, Petitioner,

vs.
STA. MONICA INDUSTRIAL and DEVELOPMENT CORPORATION and A. GUERRERO DEVELOPMENT
CORPORATION, Respondents.

DECISION

CALLEJO, SR., J.:

Before the Court is a Petition for Review on Certiorari of the Decision1 of the Court of Appeals (CA) in CA-G.R. CV No.
60085 affirming on appeal the Decision2 of the Regional Trial Court (RTC), Quezon City, Branch 105, in Civil Case No. Q-
91-10576.

JMA House Incorporated (JMA) applied for a ₱1,500,000.00 loan from the Pioneer Savings and Loan Association, Inc.
(Pioneer). To secure payment thereof, JMA executed a real estate mortgage over a parcel of land identified as Lot No. 4,
Block No. 13, Subdivision Plan No. Psd-35337 covered by Transfer Certificate of Title (TCT) No. 268126. The lot, which
was located in Quezon City across Gate 1 of the Maryknoll College, had an area of 1,611.6 square meters.3 There was
likewise a three-storey commercial and residential building which was occupied by tenants.4 Upon the failure of JMA to pay
its loan, the real estate mortgage was foreclosed extrajudicially. Pioneer was the winning bidder at ₱2,000,000.00 during the
sale at public auction held on August 26, 1985. The Sheriff executed a Certificate of Sale over the property in favor of
Pioneer which was annotated at the dorsal portion of TCT No. 268126 on October 11, 1985.5 JMA had one year or until
October 11, 1986 to redeem the property.

JMA decided to redeem the property from Pioneer sometime in June 1986. It offered to borrow from Sta. Monica Industrial
and Development Corporation (Sta. Monica) the amount of ₱2,300,000.00. During the negotiations between Rosita Alberto,
the General Manager of JMA, and Sta. Monica’s president Eugenio Trinidad, the parties agreed that the latter would
purchase the property for ₱3,021,000.00.6 Trinidad insisted that JMA execute a deed of absolute sale over the property for
the price of ₱4,100,000.00. Rosita Alberto suggested that instead of a deed of absolute sale, a real estate mortgage be
executed considering that the property was worth much more than ₱4,100,000.00. Trinidad refused. By way of a
compromise, Alberto suggested that a supplement deed giving JMA the option to repurchase the property within a period of
two years be executed.7 Trinidad agreed to this proposal. Thus, the lawyers of JMA and Sta. Monica prepared two
deeds.8 From the ₱3,021,000.00 it received from Sta. Monica, JMA remitted ₱2,300,000.00 to Pioneer.

On June 23, 1986, Pioneer and JMA executed a Deed of Legal Redemption and Absolute Sale in which Pioneer, for and
consideration of ₱2,300,000.00, transferred to JMA all the rights over the property, including the improvements thereon,
which Pioneer acquired under the Certificate of Sale.9 The parties, likewise, declared therein that it was their intention that,
with the execution of said deed, the loan of JMA amounting to ₱1,250,000.00, including all interests, penalties and charges
thereon, were considered fully paid and legally extinguished.10

On June 30, 1986 JMA, represented by its General Manager Rosita Alberto, executed a Deed of Absolute Sale over the lot,
including the buildings thereon, in favor of Sta. Monica, represented by Eugenio Trinidad. The receipt for ₱4,100,000.00 as
purchase price was acknowledged by JMA from Sta. Monica.11 As agreed upon by the parties, the parties likewise executed
a contract denominated as Option to Buy, in which Sta. Monica gave JMA the option to buy the property for ₱4,100,000.00
within one (1) year from the execution of the Deed Of Absolute Sale on or before July 1, 1987, with a "grace period" of one
year immediately upon the expiration thereof (until July 1, 1988). The parties agreed that, in case JMA availed of such
extension, JMA would be obligated to pay an additional amount equivalent to 3.5% a month as liquidated damages, until the
whole amount is fully paid and/or the option is finally exercised.12

Alberto turned over to Trinidad the owner’s duplicate of TCT No. 26812.6 The Register of Deeds thereafter issued TCT No.
347638 in the name of Sta. Monica;13 however, the Option to Buy was not annotated at the dorsal portion of the title.

As agreed upon between JMA and Sta. Monica, the latter thenceforth paid the realty taxes on the property. 14 JMA continued
collecting the rentals from the tenants of the buildings with the knowledge and conformity of Sta. Monica. On November
17, 1986, Sta. Monica mortgaged the property to the PCI Capital Corporation as security for a ₱3,600,000.00 loan.15

24
In a letter dated January 26, 1988, Sta. Monica, through Eugenio Trinidad, informed Rosita Alberto and the tenants of the
buildings in the property that due to the failure of JMA to "repurchase" the property, it had been sold to A. Guerrero
Development Corporation (AGCOR) effective February 1, 1988, and, as the new owner, AGCOR would be collecting the
rentals.16 Rosita Alberto protested to Trinidad, insisting that the period given to JMA to buy back the property had not yet
elapsed. Nevertheless, on February 2, 1988, Sta. Monica and AGCOR executed a Deed of Absolute Sale over the property
for ₱5,700,000.00, receipt of which was acknowledged by Sta. Monica.17 Part of the amount was used by Sta. Monica to
redeem the property from PCI Capital Corporation which executed a Release of Real Estate Mortgage on February 16,
1988.18 On February 17, 1988, the Register of Deeds issued TCT No. 376746 in the name of AGCOR.19 It paid the realty
taxes on the property starting 1988.20

Despite the sale of the property to AGCOR, Trinidad received, on June 30, 1988, five checks from Rosita Alberto drawn
against the account of JMA in the total amount of ₱3,000,000.00. He likewise received ₱57,000.00 from Atty. Rosalie
Alberto, Rosita’s sister and a member of the JMA Board of Directors "as partial payment of the account of JMA for the
property located at No. 335, Katipunan Street, Quezon City."21 However, the checks were dishonored by the drawee
Bank.22 Trinidad failed to return the cash amount of ₱57,000.00 to JMA.

On October 30, 1989, AGCOR mortgaged the property to Planter’s Development Bank as security for a ₱7,000,000.00
loan.23

Almost two years thereafter, or on November 11, 1991, JMA filed a complaint against Sta. Monica and AGCOR, as
defendants, in the RTC of Quezon City for specific performance, reconveyance and damages. It alleged that it mortgaged its
property to Sta. Monica as security for a ₱3,021,000.00 loan and ₱1,079,000.00 as interest; however, upon the insistence of
Trinidad, in lieu of a real estate mortgage, a deed of absolute sale was executed over the property for the price of
₱4,100,000.00; an Option to Buy was also executed in its favor, giving it the option to buy the property for ₱4,100,000.00
within a period of one (1) year from execution thereof, and in the meantime, it retained dominion over the property; on
January 26, 1988, it received notice that beginning February 1, 1988, the tenants will pay their rentals to the new owner of
the property, defendant AGCOR, to which it protested; defendant Sta. Monica assured the plaintiff that defendant AGCOR
was aware of its option to buy the property.

JMA further alleged that it informed defendant Sta. Monica on June 30, 1988 that it was ready to repurchase the property
for ₱5,822,000.00 with an initial payment of ₱3,057,000.00 to be immediately tendered on said date, and the remaining
balance of ₱2,765,000.00 after one month. Sta. Monica assured JMA that the property would be delivered to it with
AGCOR’s conformity. JMA paid ₱3,057,000.00 on June 30, 1988, per redemption receipt issued by Trinidad, who however
refused to receive the balance. Despite representations to defendant AGCOR to abide by the Option to Buy, AGCOR
maintained its right to possess and own the property and even filed ejectment cases against it; worse, Sta. Monica never
returned the downpayment given on June 30, 1988 and continues to benefit therefrom.

JMA averred that it had a right to repurchase the property under the terms of the Option to Buy Agreement dated June 30,
1986, considering that the transaction actually entered into is one of equitable mortgage and not a deed of sale with option
to buy. Defendant Sta. Monica is mandated by law to abide by the said agreement and could not have sold the questioned
property to defendant AGCOR, taking into account that it has accepted the amount of ₱3,057,000.00 as downpayment for
the purchase price. Having sold the property to AGCOR, defendant Sta. Monica must be made to pay the plaintiff the
amount of ₱15,000,000.00 which is the actual market value of the property, as well as the rental payments which it failed to
collect.24 The plaintiff prayed that judgment be rendered in its favor, thus:

WHEREFORE, it is most respectfully prayed of this Honorable Court that judgment be rendered in favor of the plaintiff
ordering:

1) Defendants Sta. Monica and AGCOR to respect and acknowledge the right of JMA to repurchase and
consequently own and possess the property free from liens and all encumbrances;

2) Defendants to solidarily pay the plaintiff the accrued rentals of ₱2,362,500.00 as of October 1991, with an
additional ₱52,500.00 every month thereafter until defendant AGCOR ceases to collect the mentioned rentals from
the tenants of the premises;

3) Ordering defendants to pay exemplary damages in the amount of ₱100,000.00, nominal damages in the amount
of ₱100,000.00, attorney’s fees in the sum of ₱200,000.00 and the costs of suit;

Just and equitable reliefs are, likewise, prayed for under the premises.25

25
For its part, Sta. Monica alleged in its Answer to the complaint the following special and affirmative defenses: (1) JMA has
no cause of action against it; (2) the complaint is unfounded and malicious; (3) it acted in good faith; (4) the supposed
"Option to Buy" is not supported by valuable consideration and, therefore, is unenforceable; (5) assuming arguendo that
there was an extension to exercise the said "Option to Buy," it was not in writing, without consideration and, therefore,
unenforceable; (6) the amount/s which JMA had given to it had been offset by the value of the property and the resulting
damages sustained by it (Sta. Monica). Defendant claimed ₱1,000,000.00, ₱500,000.00, ₱200,000.00 and ₱100,000.00
compulsory counterclaim representing actual, moral and exemplary damages, including attorney’s fees and the litigation
expenses, respectively.

Defendant AGCOR alleged in its Answer with Cross-claim and Counterclaims that the physical possession of the subject
property was voluntarily surrendered by Sta. Monica to it upon execution of the Deed of Absolute Sale. It came to know of
the alleged "Option to Buy" only on September 30, 1988 when Trinidad made an offer to repurchase the subject property
with an initial downpayment of ₱3,000,000.00, the balance to be paid on the following day. However, Trinidad never
showed up or called as promised.

As special and affirmative defenses, it claimed that there was no cause of action against it, since even assuming that an
option to buy was duly executed, it was not a party thereto. It pointed out that the option was not registered nor annotated in
the title with the Register of Deeds for the purpose of giving notice to the whole world; JMA was estopped from claiming
that its contract26 with Sta. Monica was a sale with right to repurchase, considering that there was no pre-existing condition
or limitation whatsoever to serve as notice to third persons dealing with the said property; it was a purchaser in good faith
without knowledge of any agreement between JMA and Sta. Monica or any fact that would vitiate consent in the acquisition
of the property; it acquired legal title thru sale and in fact, TCT No. 376746 was issued in its name; and JMA is guilty of
laches and it had not completely exercised its option to repurchase by paying the total amount and there is no proof that the
option was extended by Sta. Monica for another year.

By way of cross-claim, AGCOR alleged that JMA and Sta. Monica should be the only parties in this case, since they
executed the "Option to Buy," to its exclusion. Because of its inclusion as defendant, its goodwill was damaged and it was
deprived of its right of full ownership; thus, cross-defendant Sta. Monica should be held liable for actual or compensatory
damages in the amount of ₱1,000,000.00. It likewise asserted compulsory counterclaims in the amount of ₱500,000.00 as
moral damages, ₱300,000.00 as exemplary damages, and ₱200,000.00 as attorney’s fees.27

On January 10, 1992, Eugenio Trinidad died.28 Victor Trinidad became the President of Sta. Monica.

During trial, JMA presented Rosita Alberto and her sister, Atty. Rosalie Alberto as witnesses. Rosita testified that she
graduated from the University of the Philippines with a Bachelor of Arts degree in Economics. 29 It was Eugenio Trinidad
who insisted that JMA execute a deed of absolute sale instead of a real estate mortgage to secure the ₱4,100,000.00
loan.30 She, in turn, requested that an option to buy be executed by the plaintiff to supplement the deed of absolute sale to
which Trinidad agreed.31 JMA retained possession of the property and continued collecting rentals from the tenants since the
transaction between the parties was precisely a contract of mortgage.32 When she protested to Trinidad’s letter dated January
26, 1988 informing her and the tenants that the property had not been repurchased by JMA, Trinidad verbally assured her
that JMA could repurchase the property and pay the price thereof within a reasonable time. Trinidad agreed to the
repurchasing of the property for ₱5,822,000.00 payable in two installments, to wit: (a) ₱3,057,000.00 on June 30, 1988; and
(b) the balance of ₱2,768,000.00 within a reasonable time. On June 30, 1988, ₱3,000,000.00 in checks and ₱57,000.00 cash
was paid by JMA, through Atty. Rosalie Alberto and Atty. Rellosa to Trinidad, and for which the latter issued a redemption
receipt. JMA was ready to pay the balance of the repurchase price (₱2,768,000.00) but Trinidad could not be located, and
worse, failed to return the initial amount paid.33

On cross-examination, Rosita Alberto admitted that her agreement with Trinidad, that JMA can repurchase the property by
paying the price within a reasonable time, was merely verbal because she trusted Trinidad. 34 JMA did not file any complaint
for consignation of the amount for its repurchase of the property. 35 She admitted that the checks delivered to Trinidad had
been dishonored.36 The respective lawyers of Sta. Monica and JMA typed the deed of absolute sale and option to buy. 37

Atty. Rosalie Alberto testified that JMA is a family corporation. She learned of the deed of absolute sale and option to buy
only in February 1988.38 She represented JMA in the negotiations with Trinidad for the repurchase of the property. Trinidad
informed her that he had already informed defendant AGCOR of plaintiff’s tender of ₱3,057,000.00. He, however,
suggested that she personally inform AGCOR of said tender. When she did so, Guerrero informed her that AGCOR could
no longer accept the offer.39 She wanted to tell Trinidad about what Guerrero had said, but she could no longer locate him.40

Franco Marquez, President of the Philippine Appraisal Co., Inc., testified that the property was appraised on May 15, 1986,
and its value was pegged at ₱11,080,000.00.41
26
Defendant Sta. Monica presented its president, Victor Trinidad, who testified on the damages sustained by it. On cross-
examination, he admitted that, despite the deed of absolute sale, it never took possession of the property. 42 Neither did
defendant collect rentals from the tenants of the building because of the option to buy. 43

Alberto Guerrero, a doctor of medicine and a lawyer, testified that he was the president of AGCOR, also a family
corporation. When the property was offered for sale by Sta. Monica, he examined the title in the Register of Deeds and
discovered that it was mortgaged to PCI Capital Corporation.44 He agreed to buy the property and paid Sta. Monica’s loan
on February 3 and 16, 1988, upon which a Release of Real Estate Mortgage was issued. 45 In due course, defendants AGCOR
and Sta. Monica executed a Deed of Absolute Sale covering the property. 46 He further declared that AGCOR secured a
₱2,500,000.00 loan from Planter’s Bank and used the money to pay Sta. Monica. On October 30, 1989, Sta. Monica
executed a real estate mortgage over the property in favor of Planter’s Bank as security for a ₱7,000,000.00 loan. The deed
was annotated at the dorsal portion of TCT No. 376746 on November 15, 1980.47 The property was declared for taxation
purposes after the property had been purchased.48

On January 26, 1996, JMA filed an Omnibus Motion to Admit Newly-Discovered Evidence, which included the Appraisal
Report of the Philippine Appraisal Co., Inc.49 to prove the fair market value of the property as of February 1, 1988. The RTC
granted the motion and allowed Franco M. Marquez to testify on the Appraisal Report. 50 The plaintiff offered the Report as
part of the motion and to prove that the appraisal value of the property in May 1986 was ₱11,080,000.00. The report was
admitted as part of the testimony of Marquez.51

On December 8, 1997, the trial court rendered judgment in favor of the defendants. It ordered the dismissal of the complaint
and ordered the plaintiff to pay ₱50,000.00 to each of the defendants. The fallo of the decision reads:

WHEREFORE, in light of the foregoing, the Court renders judgment as follows:

1. Plaintiff’s complaint is dismissed and it is ordered on the counterclaim, to pay the amount of ₱50,000.00 each to
defendant Sta. Monica Industrial & Development Corporation and defendant A. Guerrero Development
Corporation as attorney’s fees; and to pay the costs of suit;

2. The cross-claim of A. Guerrero Development Corporation against Sta. Monica Industrial and Development
Corporation is dismissed.

SO ORDERED.52

The trial court disbelieved the testimony of Atty. Alberto, holding that to declare the transaction between the plaintiff and
defendant Sta. Monica as an equitable mortgage would be unjust to the latter.53 The trial court noted that the plaintiff agreed
to the execution of the deed of absolute sale and the option to buy; Rosita Alberto was an Economics graduate and was
assisted by a lawyer. When the deed of absolute sale over the property was executed, JMA even offered to repurchase/buy
the property instead of redeeming it, and waited up to June 30, 1988 to tender the repurchase price. The RTC concluded that
the true intention of the parties was the property to be sold to Sta. Monica for profit, with JMA retaining the option to buy it
back for ₱4,100,000.00 within a specific period of time. Moreover, considering that JMA failed to file an action for
reformation of deed, it was estopped from claiming that the deed of absolute sale and option to buy failed to reflect the true
intention of the parties.

The RTC ruled that the Appraisal Report had no probative weight because the property subject thereof was covered by TCT
No. 20416, not the property covered by TCT No. 268216 which was the subject of the contract between the plaintiff and
defendant Sta. Monica. Further, the remittances made to Trinidad by way of checks did not buttress the case for JMA
because they were so remitted after the stipulated one-year period and was short of the agreed amount of ₱4,100,000.00. It
was further pointed out that the checks bounced.

The RTC also declared that before AGCOR bought the property, it had no knowledge of the option to buy executed by JMA
and Sta. Monica; and even if it had, JMA had failed to exercise its option and pay the purchase price of the property within
the stipulated period. It was further stated that there is no evidence to prove the supposed obligation of Sta. Monica to return
the amount of ₱57,000.00 received by Trinidad on June 30, 1988; there is no evidence that he was authorized by Sta.
Monica to do so and that he received the amount for and in its behalf. 54

JMA appealed the decision to the CA. On January 28, 2002, the appellate court dismissed the appeal and affirmed the
decision of the RTC, holding that the contracts entered into by the parties are what they purport to be: a Deed of Absolute
Sale and Option to Buy; the deeds were notarized, hence, are public documents, and have the presumption of regularity.

27
Furthermore, there were no ambiguities in the deeds. It was further held that JMA was barred by laches to enforce its claim
that the deed of absolute sale was in fact an equitable mortgage. It pointed out that the property was not repurchased within
the timeline fixed in the Option to Buy.55

JMA filed a motion for the reconsideration of the decision which the CA denied on July 1, 2002. 56

JMA, now petitioner, filed the instant petition for review on certiorari, seeking to reverse the ruling of the CA on the
following grounds:

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT APPLYING ARTICLE 1602 OF THE
CIVIL CODE AND NOT HOLDING THAT THE CONTRACT SUBJECT MATTER OF THE INSTANT
PETITION IS THAT OF AN EQUITABLE MORTGAGE.

II

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT PETITIONER IS

GUILTY OF LACHES IN ASSERTING ITS RIGHT OVER ITS PROPERTY.

III

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN UPHOLDING THE FINDING OF THE
LOWER COURT THAT RESPONDENT AGCOR HAS NO KNOWLEDGE OF THE OPTION TO BUY.57

It maintains that the trial court and the CA failed to consider the testimony of its General Manager Rosita Alberto, to prove
that the contract entered into between it and respondent Sta. Monica is, in reality, a real estate mortgage. Petitioner
maintains that the trial court and the appellate court ignored the facts based on the following evidence: (1) petitioner was in
dire need of money when it executed the Deed of Absolute Sale and Option to Buy on June 30, 1985; (2) it continued to
possess the property after the execution of the Deed of Sale and Option to Buy, and even collected the rentals from the
tenants of the commercial and residential buildings; (3) the purchase price of ₱4,100,000.00 is grossly inadequate as
purchase price of the property compared to its market value (₱11,080,000.00) as found by the Philippine Appraisal
Company.

On the other hand, respondents aver that the issues raised by the petitioner are factual, which the Court is proscribed from
reviewing. Moreover, the findings of facts of the trial court were affirmed by the CA; hence, such findings are conclusive
on this Court. They insist that the CA decision is in accord with the law and the evidence on record. Article 1602 of the
New Civil Code does not apply in this case because petitioner failed to exercise its option and pay the agreed upon
repurchase price; hence, the CA correctly ruled that it was barred by laches when it filed its complaint below only on
November 11, 1991.

The threshold issues are the following: (1) whether the Court is proscribed from reviewing the factual issues raised by
petitioner; (2) whether the transaction between the parties is an equitable mortgage; (3) whether the petitioner is barred by
laches from filing the action against the respondent; and (4) whether respondent AGCOR was in good faith when it
purchased the property from respondent Sta. Monica for ₱5,700,000.00.

The petition is denied for lack of merit.

Section 1, Rule 45 of the Rules of Court provides that only questions of law may be raised in this Court. Th e rationale for
the rule is that the Court is not a trier of facts; it is not to re-examine and calibrate the evidence on record, as such task is
assigned to the trial court. The trial court’s findings, as affirmed by the CA, are conclusive on this Court unless there is
preponderant evidence that the lower court ignored, misconstrued or misinterpreted cogent and substantial facts and
circumstances which, if considered, would modify or reverse the outcome of the case. 58 The Court may look into and resolve
factual issues in exceptional cases such as when the findings and conclusions of the trial court are contrary to evidence on
record or tainted with grave abuse of discretion amounting to excess of jurisdiction.

On the second issue, the law is that if the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulations shall control.59 When the language of the contract is explicit,
leaving no doubt as to the intention of the drafters, the courts may not read into it any other intention that would contradict
28
its plain import.60 The clear terms of the contract should never be the subject matter of interpretation. Neither abstract justice
nor the rule of liberal interpretation justifies the creation of a contract for the parties which they did not make themselves or
the imposition upon one party to a contract or obligation not assumed simply or merely to avoid seeming hardships. 61 Their
true meaning must be enforced, as it is to be presumed that the contracting parties know their scope and effects. 62 If the
parties execute two or more separate writings covering a common transaction and subject matter, the writings should be
read and interpreted together to render the parties’ intention effective.63 On the other hand, if the contract is ambiguous or
the contracting parties offer conflicting claims on their intent, the trial court, at the first instance, has to ascertain the true
intent of the parties, taking into account the contemporaneous and subsequent conduct, actions and words of the parties
material to the case,64 and pertinent facts having a tendency to fix and determine the real intent of the parties and
undertaking shall be considered. It is the parties’ intention which shall be accorded primordial consideration. The
reasonableness of the result obtained, after analysis and construction of the contract/contracts, must also be carefully
considered.65 The ascertained intention of the parties is deemed an integral part of the contract, as though it had been
originally expressed in unequivocal terms. The Court will enforce the true agreement of the parties even if the property in
question has already been registered and a new transfer certificate of title is issued in the name of the transferee. 66

The rule is that he who alleges that a contract does not reflect the true intention of the parties thereto may prove the same by
documentary or parol evidence.67 In this case, petitioner alleges that the Deed of Absolute Sale and Option to Buy do not
reflect the true intention of the parties, which according to it is a loan with mortgage or an equitable mortgage. The
petitioner is burdened to prove, by clear and convincing evidence, the terms of the writings. 68 In the language of State
Supreme Court of North Carolina in O’briant v. Lee,69 "the intention must be established, not by simple declarations of the
parties, but by proof of facts and circumstances, inconsistent with the rule of absolute purchase, otherwise, the solemnity of
deeds would always be exposed to the slippery memory of witnesses." The presumption is that the contract is what it
purports to be; and, to establish its character as a mortgage, the evidence must be clear, unequivocal and convincing which
reasons tending to show that the transaction was intended as a security for debt; and thus to be a mortgage must be sufficient
to satisfy every reasonable mind without hesitation.70 A less rigorous rule would mean that no man is safe in taking a deed
of property. It would be only necessary for the grantor to bring witnesses to an agreement that the deed was regarded as an
equitable mortgage, to enable him, on payment of the purchase price and interest, to redeem, particularly if the value of the
property had doubled or trebled in ratio.71 Unless the testimony is entirely plain and convincing beyond reasonable
controversy, the writing will be held to express correctly the intention of the parties.72 If there is a doubt as to the fact
whether the transaction is in the nature of a mortgage, the presumption, in order to avoid a forfeiture is always in favor of a
position to redeem, to subserve abstract justice and avert injurious consequences. 73

An equitable mortgage is one which, although lacking in some formality, or form or words or other requisites deemed
required by statutes nevertheless reveals the intention of the parties to charge a real property as security for a debt and
contains nothing impossible or contrary to law. An equitable mortgage may be constituted by any writing from which the
intention to create such a lien may be patterned.

Under Article 1602 of the New Civil Code, a contract shall be presumed to be an equitable mortgage in any of the following
cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending the period of
redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall
secure the payment of a debt or the performance of any other obligation.

For the presumptions under the article to apply, two requisites must concur: (1) that the parties entered into a contract
denominated as a sale; and (2) that their intention was to secure an existing debt by way of mortgage.74 In order for a deed to
be declared a mortgage, the relation of debtor and creditor must exist between the grantor in such a deed and one who seeks
to have it declared a mortgage.75 There must be a continuing binding debt; a debt in its fullest sense. Where there is no debt,
there can be no mortgage; for if there is nothing to secure, there can be no security.76 If there is an indebtedness or liability

29
between the parties, either a debt existing prior to the conveyance, or a debt arising from a loan made at the time of the
conveyance, or from any other cause, and this debt is still left subsistent, not being discharged or satisfied by the
conveyance, but the grantor is regarded as still owing and bound to pay at some future time, so that the payment stipulated
for in the agreement to re-convey is in reality the payment of this existing debt, then the whole transaction amounts to a
mortgage, whatever stipulation they may have inserted in the instruments. If there is no relation of debtor-creditor, but by
the terms of the contract one is merely given an option to buy real property for a fixed amount and for a fixed price, there is
no equitable mortgage; the optionee is not bound to buy and to pay for said real property. 77

In the present case, the trial and appellate courts declared that based on the evidence on record, petitioner sold the property
to respondent Sta. Monica for ₱3,021,000.00; as stated in the Option to Buy, petitioner may opt to repurchase the property
for ₱4,100,000.00. Respondent Sta. Monica agrees with the findings of the trial court and the appellate court. 78

The trial court failed to make any finding why petitioner sold the property to respondent Sta. Monica for ₱3,021,000.00,
which is contrary to what appears on the face of the deed of absolute sale - ₱4,100,000.00-which amount petitioner
acknowledged to have received from said respondent. Although petitioner claimed in its complaint that the true purchase
price of the property was ₱3,021,000.00 and that it borrowed from respondent Sta. Monica ₱1,079,000.00 as mortgage for
one year (from June 30, 1986 to June 30, 1987), no testimonial and documentary evidence was adduced to prove the same.
Petitioner was burdened to prove its claim in its complaint that it borrowed ₱3,021,000.00 from respondent Sta.
Monica,79 failing which its claim will be defeated even if respondents failed to present any evidence to prove their side. 80

To reiterate, there is no evidence on record that petitioner borrowed ₱3,021,000.00 from respondent Sta. Monica in 1986 as
alleged in its complaint. The only evidence on record is that petitioner decided in June 1986 to redeem the property from
Pioneer much earlier than the one-year-period therefor and needed ₱2,300,000.00 for the purpose. Petitioner received the
amount from respondent Sta. Monica and was able to redeem the property from Pioneer. The only evidence of petitioner
that it received money from respondent Sta. Monica is the Deed of Absolute Sale, in which the petitioner acknowledged to
have received ₱4,100,000.00.

The "Redemption Receipt" signed by Trinidad on June 30, 1988 for ₱3,000,000.00 in the form of checks and ₱57,000.00 in
cash "as partial payment of the account of JMA for the property x x x" does not constitute evidence that petitioner secured a
loan of ₱3,021,000.00 from respondent Sta. Monica in June 1986. The said amount was part of the ₱5,822,000.00 which
petitioner was obliged to pay to respondent Sta. Monica, in case it opted to buy the property under the Option to Buy,
representing the repurchase price, inclusive of liquidated damages. In fact, Rosita Alberto testified that petitioner expected
respondent Sta. Monica to execute a deed of sale over the property upon its payment of ₱4,100,000.00. This is gleaned from
the testimony of Atty. Alberto:

Atty. Balbastro:

Q Let me put it this way, under these documents, Exhibits B and C, more particularly Exhibit C, the Option to Buy, JMA
House Incorporated was given up to June 30, 1988 within which to exercise her option to buy, is that correct?

A Yes, Sir.

Q And as of June 30, 1988, how much money did you tender to Sta. Monica Industrial Corporation?

A I tendered a total amount of three million fifty-seven thousand pesos, Sir.

Q And how much is the redemption price, if you know? If you know the repurchase price?

A Based on the papers that can be found on the deed of absolute sale, if JMA House Incorporated was to redeem the
property during the first year, we were supposed to repurchase on time.

COURT:

Q You are a lawyer, right?

A Yes, Your Honor.

WITNESS:

30
A To repurchase the property within the first year, a total amount of four million one hundred thousand pesos, inclusive of
interest, was supposed to be paid. If the repurchase was to be made on the second year, interests of 3.5 per cent per month
was to be added on the face value which is one million one hundred thousand pesos.

xxxx

Atty. Balbastro:

Q Aside from Exhibit G, you do not have any other document concerning the payment you made to Sta. Monica Industrial
Corporation?

A No other.

Q Now, subsequent to the payments (sic) of Exhibits B and C, no other written document was executed between JMA
House Incorporated and Sta. Monica Industrial and Development Corporation, is that correct?

A No other because we were expecting that the next document to be executed was a deed of absolute sale of Sta. Monica
Industrial Corporation back to JMA House Incorporated covering the property.81

If, as claimed by petitioner, the transaction between it and respondent Sta. Monica was an equitable mortgage, the latter
would be obliged to execute a Cancellation of Real Estate Mortgage or Release of Mortgage over the property in favor of
the petitioner. But, as admitted by Rosita Alberto, petitioner did not expect respondent Sta. Monica to execute any of these;
petitioner expected that a deed of sale would be executed in its favor.

It bears stressing that petitioner and respondent Sta. Monica were assisted by their respective lawyers during the
negotiations held between Rosita Alberto and Trinidad. While Trinidad insisted on a deed of absolute sale, Rosita Alberto
suggested that a real estate mortgage be executed by the parties instead. Trinidad rejected this, upon which Rosita proposed
that an option to buy be executed as a supplement to the deed of absolute sale, to which Trinidad readily agreed. Obviously,
the parties had arrived at a compromise to execute two deeds: a deed of absolute sale for ₱4,100,000.00, and a deed of
option to enable petitioner to buy the property for the same price. Rosita Alberto testified, thus:

Q Now, you also made mention that you had mortgaged the property to Sta. Monica Industrial Corporation. Did you
execute any document to prove that mortgage?

A Yes. Through the negotiation we were talking about a real estate mortgage but Mr. Trinidad insisted on a deed of sale in
their favor. However, I requested for another document an option to buy/option to repurchase which is supplement to the
deed of sale which would give us two years from the date of signing, to repurchase the property.

ATTY. LAZARO:

Q Madam Witness, do you still recall the exact date when this deed of absolute sale was executed?

A It was June 30th 1986.

Q And how about the option to buy agreement that you are mentioning? When was it executed?

A It was executed [simultaneously] on the same day, June 30, 1986.

Q I am going to show you now a deed of absolute sale between JMA House Incorporated and Sta. Monica Industrial and
Development Corporation which has been previously marked as Exhibit B and Exhibit B-1. What is the relation of this deed
of absolute sale to the one that you are referring to?

A This is the same deed of absolute sale that we signed.

Q And I am calling your attention to Exhibit B-1 wherein the signature over and above the name Rosita Alberto [appears],
whose signature is that?

A My signature, Sir.
31
Q And I am also calling your attention to the signature over and above the name Eugenio E. Trinidad, President and General
Manager. Whose signature is that?

A Mr. Trinidad[’s].82

The respective lawyers of petitioner and respondent Sta. Monica thereafter prepared the deeds which were executed on June
30, 1986 before the same Notary Public, Atilano H. Lim. According to Rosita Alberto, the Option to Buy supplemented the
Deed of Absolute Sale. The testimony of Rosita Alberto on the matter follows:

Q Alright, I will read to you your Exh. "C," under the second WHEREAS, and I quote: Whereas, the parties in the
aforementioned Deed mutually agreed that the VENDOR JMA HOUSE INCORPORATED is given an option to buy back
the properties subject thereto…" Do you recall this provision?

A Yes. This is the document.

Q And, in this second WHEREAS, the aforementioned Deed referred to here is the Deed referred to in the first WHEREAS,
that is the Deed of Absolute Sale, marked as Exhibit "B", is that correct?

A Yes.

Q I am going back to my first question. In other words, the basis of the option to buy is the supposed mutual agreement
between JMA House Incorporated and Sta. Monica Industrial and Development Corporation to give JMA House
Incorporated the [option] to buy back the property as provided in the Deed of Absolute Sale marked here as Exhibit "B," is
that correct?

A They were supplementing each other, the option to buy and the deed of absolute sale. 83

The fact that petitioner sold the property to respondent Sta. Monica is evidenced by Rosita Alberto’s admission that she
delivered to respondent Sta. Monica the owner’s duplicate of TCT No. 268126, after which the latter had the property
registered in its name, conformably with their "pre-arrangement." This can be gleaned from her testimony, in answer to the
questions of counsel of respondent AGCOR:

ATTY. LUCAS:

Q After June 30, 1986, Your Honor.

WITNESS:

A After June 30, 1986, the taxes were paid by STA. MONICA. That was the pre-arrangement, Your Honor, with STA.
MONICA. And it would be absurd for JMA to pay the taxes when the title was with STA. MONICA. And we believe that
they would be using it for their purposes, the title; for STA. MONICA’s purposes. So, they are more than willing to take up
the taxes.84

Although Rosita Alberto did not specify the particulars of her "pre-arrangement" with Trinidad outside of the Deed of
Absolute Sale and Option to Buy, it can safely be presumed that they agreed that petitioner would continue collecting
rentals from the tenants, and respondent may mortgage the property as security for its ₱3,600,000.00 loan from the PCI
Capital Corporation. Petitioner would then be able to generate funds for the purchase of the property on or before June 30,
1987 or 1988, partly from the rentals. On the other hand, respondent Sta. Monica was able to generate funds from its loan,
with the property as collateral, for its business. Both parties benefited under the arrangement.

While it is true that per Appraisal Report of the Philippine Appraisal Corporation, the property of the petitioner had a value,
as of 1986, of ₱11,080,000.00, despite which, Alberto agreed to sell the property for ₱4,100,000.00 under the Deed of
Absolute Sale, nevertheless, Alberto cannot be faulted. After all, under the Option to Buy, petitioner was obliged to pay
only ₱4,100,000.00.

It must be stressed that an option is a continuing offer or contract by which an owner stipulates with another that the latter
shall have the right to buy the property at a fixed price with a certain time, or under, or in compliance with, certain terms
and conditions; or which gives to the owner of the property the right to sell or demand a sale. 85 It is, in fine, an unaccepted
offer, governed by the second paragraph of Article 1479 of the New Civil Code which states that "a promise to buy and sell
32
a determinate thing for a price certain is reciprocally demandable." An option is not of itself a purchase, but merely secures
the privilege to buy. An option is a privilege given by the owner of the property to another to buy the property at his
election, and the owner does not sell the property but gives another the right to buy at his election. 86 It imposes no binding
obligation on the person holding the option, aside from the consideration for the offer. Without acceptance, it is not,
properly speaking, treated as a contract, and does not vest, transfer or agree to transfer, any title to, or any interest or right in
the subject property, but is merely a contract by which the owner of the property gives the optionee the right or privilege of
accepting the offer and buying the property on certain terms.87

Thus, an option contract involves two distinct elements, that is: (1) the offer to sell, which does not become a contract until
accepted; (2) the completed contract to lease the offer for a specified time.88 It is a separate and distinct contract from that
which the parties may enter into, upon the consummation of the option.

It bears stressing that an option must be supported by a consideration distinct and separate from the price.  A consideration
1âwphi1

for an optional contract is just as important as the consideration for any other kind of contract. 89 If there is no consideration
for the optional contract, then it cannot be enforced anymore than any other contract where no consideration
exists.90 However, case law is that although an option is not binding as a contract for want of consideration, yet if the offer
contained therein is not withdrawn, its acceptance within the time limited gives rise to a contract of sale, binding on the
vendor, which cannot be affected by any subsequent attempt to withdraw the offer.91

The optionee or promisee is burdened to prove such consideration for the option. The consideration for the option is not
presumed. In Villamor v. Court of Appeals,92 the Court ruled that consideration is "the why of the contract, the essential
reason which moves the contracting parties to enter into the contract."93 The consideration for a contract, including an
option, need not be money or anything of monetary value but may consist of either a benefit or a detriment to the
promisor.94 There is sufficient consideration for a promise if there is any benefit to the promisee or any detriment to the
promisor. A benefit should not necessarily accrue to the promisee if a detriment to the promisor is present; and there is
consideration if the promisee does anything legal which he is not bound to do or refrain from doing anything which he has a
right to do, whether or not there is any actual loan or detriment to him or actual benefit to the promisor. 95 It is sufficient that
something valuable flows from the person to whom it is made, or that he suffers some prejudice or inconvenience, and that
the promise is the inducement to the transaction. Indeed, there is a consideration if the promisee, in return for the promise,
does anything legal which he is not bound to do, or refrains from doing anything which he has a right to do, whether there is
any actual loss or detriment to him or actual benefit to the promisor or not. 96

We agree with the rulings of the trial court and the CA that the option granted to the petitioner has a consideration distinct
from the purchase price of the property for ₱4,100,000.00.

As gleaned from the Option to Buy itself, the agreement was executed by the parties because of the Deed of Absolute Sale
they had executed on the same occasion. Instead of the parties executing a Real Estate Mortgage as suggested by petitioner,
the parties, by way of compromise, agreed to execute a Deed of Absolute Sale, on the condition that they execute an Option
to Buy, giving petitioner the privilege to repurchase the property within a period of one year, with a grace period of one year
immediately upon the expiration of the original one year period. As admitted by Rosita Alberto, the two deeds
complemented each other, the Option to Buy being a supplement to the Deed of Absolute Sale. In fine, petitioner would not
have agreed to sell the property to respondent Sta. Monica unless petitioner was given the option to repurchase the property
for the same amount.

However, we agree with the ruling of the CA that petitioner failed to exercise its option and notify respondent Sta. Monica
of its acceptance of the latter’s offer within the timeline under the Option to Buy. Under the said deed, petitioner had one
year from June 30, 1986 or up to June 30, 1987 to exercise its option, and in case of failure to do so, it had a one year grace
period (from July 1, 1987 to June 30, 1988), provided that, in the latter case, it would pay equitable damages of 3.5% a
month from July 1, 1987 to June 30, 1988 until full payment of the purchase price or until the option is finally exercised.
The pertinent portion of the contract reads:

NOW, THEREFORE, for and in consideration of the foregoing premises, stipulations and conditions, the JMA HOUSE
INCORPORATED is hereby given an option to buy back the subject properties mentioned in the aforesaid Deed of
Absolute Sale, and in like manner the STA. MONICA INDUSTRIAL AND DEVELOPMENT CORPORATION hereby
undertakes and binds itself to resell the same unto the said JMA HOUSE INCORPORATED within a period of One (1) year
from and after date of execution of the said Deed for a fixed consideration of FOUR MILLION ONE HUNDRED
THOUSAND PESOS (₱4,100,000.00) Philippine Currency; PROVIDED, HOWEVER, should the said JMA HOUSE
INCORPORATED failed (sic) to exercise the herein option to buy back within the above-stated period, the JMA HOUSE
INCORPORATED be (sic) given a grace period of another One (1) year immediately thereafter. In case of such extension

33
the JMA HOUSE INCORPORATED hereby undertakes and binds itself to pay an amount equivalent to Three and one-half
percent (sic) month for and as liquidated damages until the whole amount is fully paid and/or the option is finally exercised.

It is clear that petitioner failed to exercise its option on or before June 30, 1987. Neither did petitioner exercise its option
and pay the liquidated damages to respondent Sta. Monica from July 1, 1987 up to June 1988. This impelled respondent Sta.
Monica to inform petitioner that because of its failure to exercise its option to purchase the property, it had to discontinue
collecting the rentals from the tenants of the buildings. On February 2, 1988, respondent Sta. Monica sold the property to
respondent AGCOR, which secured TCT No. 376746 on February 17, 1988.

The Option to Buy provides that acceptance must be accompanied by payment of liquidated damages; such payment is a
condition precedent to the exercise of the right to buy, and the money must be tendered or offered. A mere notice of an
intention to accept, or of an acceptance without such payment or tender, does not constitute a valid
compliance.97 Respondent Sta. Monica’s acceptance of the five checks in the total amount of ₱3,000,000.00 and the cash
amount of ₱57,000.00 on June 30, 1988, as partial payment of petitioner’s account did not resuscitate the right which
petitioner had by then already lost, particularly since the property had already been sold and titled to AGCOR. The said
partial payment was an exercise in futility, made worse by the fact that the five checks were dishonored by the drawee bank.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. Costs against the petitioner.

SO ORDERED.

ROMEO J. CALLEJO, SR.

Associate justice

34
G.R. No. 135929       April 20, 2001

LOURDES ONG LIMSON, petitioner,

vs.
COURT OF APPEALS, SPOUSES LORENZO DE VERA and ASUNCION SANTOS-DE VERA, TOMAS
CUENCA, JR. and SUNVAR REALTY DEVELOPMENT CORPORATION, respondents.

BELLOSILLO, J.:

Filed under Rule 45 of the Rules of Court this Petition for Review on Certiorari seeks to review, reverse and set aside
the Decision of the Court of Appeals dated 18 May 1998 reversing that of the Regional Trial Court dated 30 June 1993. The
1 

petitioner likewise assails the Resolution of the appellate court of 19 October 1998 denying petitioner’s Motion for
2 

Reconsideration.

Petitioner Lourdes Ong Limson, in her 14 may 1979 Complaint  filed before the trial court, alleged that in July 1978
3 

respondent spouses Lorenzo de Vera and Asuncion Santos-de Vera, through their agent Marcosa Sanchez, offered to sell to
petitioner a parcel of land consisting of 48, 260 square meters, more or less, situated in Barrio San Dionisio, Parañaque,
Metro Manila; that respondent spouses informed her that they were the owners of the subject property; that on 31 July 1978
she agreed to buy the property at the price of P34.00 per square meter and gave the sum of P20,000.00 to respondent
spouses as "earnest money;" that respondent spouses signed a receipt therefor and gave her a 10-day option period to
purchase the property; that respondent Lorenzo de Vera then informed her that the subject property was mortgaged to
Emilio Ramos and Isidro Ramos; that respondent Lorenzo de Vera asked her to pay the balance of the purchase price to
enable him and his wife to settle their obligation with the Ramoses. 1âwphi1.nêt

Petitioner also averred that she agreed to meet respondent spouses and the Ramoses on 5 August 1978 at the Office of the
Registry of deeds of Makati, Metro Manila, to consummate the transaction but due to the failure of respondent Asuncion
Santos-de Vera and the Ramoses to appear, no transaction was formalized. In a second meeting scheduled on 11 August
1978 she claimed that she was willing and ready to pay the balance of the purchase price but the transaction again did not
materialize as respondent spouses failed to pay the back taxes of subject property. Subsequently, on 23 August 1978
petitioner allegedly gave respondent Lorenzo de Vera three (3) checks in the total amount of P36, 170.00 for the settlement
of the back taxes of the property and for the payment of the quitclaims of the three (3) tenants of subject land. The amount
was purportedly considered part of purchase price and respondent Lorenzo de Vera signed the receipts therefor.

Petitioner alleged that on 5 September 1978 she was surprised to learn from the agent of respondent spouses that the
property was the subject of a negotiation for the sale to respondent Sunvar Realty Development Corporation (SUNVAR)
represented by respondent Tomas Cuenca, Jr. On 15 September 1978 petitioner discovered that although respondent
spouses purchased the property from the Ramoses on 20 March 1970 it was only on 15 September 1978 that TCT No. S-
72946 covering the property was issued to respondent spouses. As a consequence, she file on the same day an affidavit of
Adverse Claim  with the Office of the Registry of Deeds of Makati, Metro, which was annotated on TCT No. S-72946. She
also claimed that on the same day she informed respondent Cuenca of her "contract" to purchase the property.

The Deed of Sale between respondent spouses and respondent SUNVAR was executed on 15 September 1978 and TCT N0.
S-72377 was issued in favor of the latter on 26 September 1978 with the adverse Claim of petitioner annotated thereon.
Petitioner claimed that when respondent spouses sold the property in dispute to SUNVAR, her valid and legal right to
purchase it was ignored if not violated. Moreover, she maintained that SUNVAR was in bad faith, as it knew of her
"contract" to purchase the subject property fro respondent spouse.

Finally, for the alleged unlawful and unjust acts of respondent spouses, which caused her damage, prejudice and injury,
petitioner claimed that the Deed of Sale,  should be annuled and TCT No. S-72377 in the name of respondent SUNVAR
canceled and TCT No. S-72946 restored. She also insisted that a Deed of Sale  between her an respondent spouses be now
executed upon her payment of the balance of the purchase price agreed upon, plus damages and attorney’s fees.

In their Answer respondent spouses maintained that petitioner had no sufficient cause of action against them; that she was
4 

not the real party in interest; that the option to buy the property had long expired; that there was no perfected contract to sell
between them; and, that petitioner had no legal capacity to sue. Additionally, respondent spouses claimed actual, moral and
exemplary damages, and attorney’s fees against petitioner.

35
On the other hand, respondents SUNVAR and Cuenca, in their Answer5 alleged that petitioner was not the proper party in
interest and/or had no cause of action against them. But, even assuming that petitioner was the proper party in interest, they
claimed that she could only be entitled to the return of any amount received by respondent spouses. In the alternative, they
argued that petitioner had lost her option to buy the property for failure to comply with the terms and conditions of the
agreement as embodied in the receipt issued therefor. Moreover, they contended that at the time of the execution of the
Deed of Sale and the payment of consideration to respondent spouses, they "did not know nor was informed" of petitioner’s
interest or claim over the subject property. They claimed furthermore that it was only after the signing of the Deed of Sale
and the payment of the corresponding amounts to respondent spouses that they came to know of the claim of petitioner as it
was only then that they were furnished copy to the title to the properly where the Adverse Claim of petitioner was
annotated. Consequently, they also instituted a Cross-Claim against respondent spouses for bad faith in encouraging the
negotiations between them without telling them of the claim of petitioner. The same respondents maintained that had they
known of the claim of petitioner, they would not have initiated negotiations with respondent spouses for the purchase of the
property. Thus, they prayed for reimbursement of all amounts and monies received from them by respondent spouses,
attorney’s fees and expenses for litigation in the event that the trial court should annul the Deed of Sale and deprive them of
their ownership and possessio of the subject land.

In their Answer to the  Cross-Claim6 of respondents SUNVAR and Cuenca, respondent spouses insisted that they negotiated
with the former only after expiration of the option period given to petitioner and her failure with her commitments
thereunder. Respondent spouses contended that they acted legally and validly, in all honesty and good faith. According to
them, respondent SUNVAR made a verification of the title with the office of the register of Deeds of Metro Manila District
IV before the execution of the Deed of Absolute Sale. Also, they claimed that the Cross-Claim was written executed by
respondent SUNVAR in their favor. Thus, respondent spouses prayed for actual damages for the unjustified filling of the
Cross-Claim, moral damages for the mental anguish and similar injuries they suffered by reason thereof, exemplary
damages "to prevent others from emulation the bad example" of respondents SUNVAR and Cuenca, plus attorney’s fees.

After a protracted trial and reconstitution of the court records due to the fire that razed the Pasay City Hall on 18 January
1992, the Regional Trial Court rendered its 30 June 1993 Decision7 in favor of petitioner. It ordered (a) the annulment and
rescission of the Deed of Absolute Sale executed on 15 September 1978 by respondent spouses in favor of respondent
SUNVAR; (b) the cancellation and revocation of TCT No. S-75377 of the Registry of Deeds, Makati, Metro Manila, issued
in the name of respondent Sunvar Realty Development Corporation, and the restoration or reinstatement of TCT No. S-
72946 of the same Registry issued in the name of respondent spouses; (c) respondent spouses to execute a deed of sale
conveying ownership of the property covered by TCT No. S-72946 in favor of petitioner upon her payment of the balance
of the purchase price agreed upon; and, (d) respondent spouses to pay petitioner P50,000.00 as and for attorney’s fees, and
to pay the costs.

On appeal, the Court of Appeals completely reversed the decision of the trial court. It ordered (a) the Register of Deeds of
Makati City to lift the Adverse Claim and such other encumbrances petitioner might have filed or caused to be annotated on
TCT No. S-75377; and, (b) petitioner to pay (1) respondent SUNVAR P50,000.00 as nominal damages, P30,000.00 as
exemplary damages and P20,000 as attorney’s fees; (2) respondent spouses, P15,000.00 as nominal damages, P10,000.00 as
exemplary damages and P10,000.00 as attorney’s fees; and, (3) the costs.

Petitioner timely filed a Motion for Reconsideration which was denied by the Court of Appeals on 19 October 1998. Hence,
this petition.

At issue for resolution by the Court is the nature of the contract entered into between petitioner Lourdes Ong Limson on one
hand, and respondent spouses Lorenzo de Vera and Asuncion Santos-de Vera on the other.

The main argument of petitioner is that there was a perfected contract to sell between her and respondent spouses. On the
other hand, respondent spouses and respondents SUNVAR and Cuenca argue that what was perfected between petitioner
and respondent spouses was a mere option.

A scrutiny of the facts as well as the evidence of the parties overwhelmingly leads to the conclusion that the agreement
between the parties was a contract of option and not a contract to sell.

An option, as used in the law of sales, is a continuing offer or contract by which the owner sitpulates with another that the
latter shall have the right to buy the property at a fixed price within a time certain, or under, or in compliance with, certain
terms and conditions, or which gives to the owner of the property the right to sell or demand a sale. It is also sometimes
called an "unaccepted offer." An option is not itself a purchase, but merely secures the privilege to buy.8 It is not a sale of
property but a sale of right to purchase.9 It is simply a contract by which the owner of property agrees with another person
that he shall have the right to buy his property at a fixed price within a certain time. He does not sell his land; he does not
36
then agree to sell it; but he does not sell something, i.e., the right or privilege to buy at the election or option of the other
party. Its distinguishing characteristic is that it imposes no binding obligation on the person holding the option, aside from
10 

the consideration for the offer. Until acceptance, it is not, properly speaking, a contract, and does not vest, transfer, or agree
to transfer, any title to, or any interest or right in the subject matter, but is merely a contract by which the owner of the
property gives the optionee the right or privilege of accepting the offer and buying the property on certain terms. 11

On the other hand, a contract, like a contract to sell, involves the meeting of minds between two persons whereby one binds
himself, with respect to the other, to give something or to render some service. Contracts, in general, are perfected by mere
12 

consent, which is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to
13 

constitute the contract. The offer must be certain and the acceptance absolute.14

The Receipt that contains the contract between petitioner and respondent spouses provides –
15 

Received from Lourdes Limson the sum of Twenty Thousand Peso (P20,000.00) under Check No. 22391 dated July
31, 1978 as earnest money with option to purchase a parcel of land owned by Lorenzo de Vera located at Barrio
San Dionisio, Municipality of Parañaque, Province of Rizal with an area of forty eight thousand two hundred sixty
square meters more or less at the price of Thirty Four Pesos (34.00) cash subject to the condition and stipulation
16 

that have been agreed upon by the buyer and me which will form part of the receipt. Should the transaction of the
property not materialize not on the fault of the buyer, I obligate myself to return the full amount of P20,000.00
earnest money with option to buy or forfeit on the fault of the buyer. I guarantee to notify the buyer Lourdes
Limson or her representative and get her conformity should I sell or encumber this property to a third person. This
option to buy is good within ten (10) days until the absolute deed of sale is finally signed by the parties or the
failure of the buyer to comply with the terms of the option to buy as herein attached.

In the interpretation of contracts, the ascertainment of the intention of the contracting parties is to be discharged by looking
to the words they used to project that intention in their contracts, all the words standing alone. The above Receipt  readily
17 

shows that respondent spouses and petitioner only entered into a contract of option; a contract by which respondent spouses
agreed with petitioner that the latter shall have the right to buy the former's property at a fixed price of P34.00 per square
meter within ten (10) days from 31 July 1978. Respondent spouses did not sell their property; they did not also agree to sell
it; but they sold something, i.e., the privilege to buy at the election or option of petitioner. The agreement imposed no
binding obligation on petitioner, aside from the consideration for the offer.

The consideration of P20,000.00 paid by petitioner to respondent spouses was referred to as "earnest money." However, a
careful examination of the words used indicated that the money is not earnest money but option money. "Earnest money"
and "option money" are not the same but distinguished thus; (a) earnest money is part of the purchase price, while option
money is the money given as a distinct consideration for an option contract; (b) earnest money given only where there is
already a sale, while option money applies to a sale not yet perfected; and, (c) when earnest money is given, the buyer is
bound to pay the balance, while when the would-be buyer gives option money, he is not required to buy, but may even
18 

forfeit it depending on the terms of the option.

There is nothing in the Receipt which indicates that the P20,000.00 was part of the purchase price. Moreover, it was not
shown that there was a perfected sale between the parties where earnest money was given. Finally, when petitioner gave the
"earnest money" the Receipt did not reveal that she was bound to pay the balance of the purchase price. In fact, she could
even forfeit the money given if the terms of the option were not met. Thus, the P20,000.00 could only be money given as
consideration for the option contract. That the contract between the parties is one of option is buttressed by the provision
therein that should the transaction of the provision therein that should the transaction of the property not materialize without
fault of petitioner as buyer, respondent Lorenzo de Vera obligates himself to return the full amount of P20,000.00 "earnest
money" with option to buy or forfeit the same on the fault of petitioner. It is further bolstered by the provision therein that
guarantees petitioner that she or her representative would be notified in case the subject property was sold or encumbered to
a third person. Finally, the Receipt provided for a period within which the option to buy was to be exercised, i.e., "within ten
(10) days" from 31 July 1978.

Doubtless, the agreement between respondent spouses and petitioner was an "option contract" or what is sometimes called
an "unaccepted offer." During the option period the agreement was not converted into a bilateral promise to sell and to buy
where both respondent spouses and petitioner were then reciprocally bound to comply with their respective undertakings as
petitioner did not timely, affirmatively and clearly accept the offer of respondent spouses.

The rule is that except where a formal acceptance is not required, although the acceptance must be affirmatively and clearly
made and evidenced by some acts or conduct communicated to the offeror, it may be made either in a formal or an informal
manner, and may be shown by acts, conduct or words by the accepting party that clearly manifest a present intention or
37
determination to accept the offer to buy the property of respondent spouses within the 10-day option period. The only
occasion within the option period when petitioner could have demonstrated her acceptance was on 5 August 1978 when,
according to her, she agreed to meet respondent spouses and the Ramoses at the Office of the Registrar of Deeds of Makati.
Petitioner’s agreement to meet with respondent spouses presupposes an invitation from the latter, which only emphasizes
their persistence in offering the property to the former. But whether that showed acceptance by petitioner of the offer is
hazy and dubious.

On or before 10 August 1978, the last day of the option period, no affirmative or clear manifestation was made by petitioner
to accept the offer. Certainly, there was no concurrence of private respondent spouses’ offer and petitioner’s acceptance
thereof within the option period. Consequently, there was no perfected contract to sell between the parties.

On 11 August 1978 the option period expired and the exclusive right of petitioner to buy the property of respondent spouses
ceased. The subsequent meetings and negotiations, specifically on 11 and 23 August 1978, between the parties only showed
the desire of respondent spouses to sell their property to petitioner. Also, on 14 September 1978 when respondent spouses
sent a telegram to petitioner demanding full payment of the purchase price on even date simply demonstrated an inclination
to give her preference to buy subject property. Collectively, these instances did not indicate that petitioner still had the
exclusive right to purchase subject property. Verily, the commencement of negotiations between respondent spouses and
respondent SUNVAR clearly manifested that their offer to sell subject property to petitioner was no longer exclusive to her.

We cannot subscribe to the argument of petitioner that respondent spouses extended the option period when they extended
the authority of their until 31 August 1978. The extension of the contract of agency could not operate to extend the option
period between the parties in the instant case. The extension must not be implied but categorical and must show the clear
intention of the parties.
1âwphi1.nêt

As to whether respondent spouses were at fault for the non-consummation of their contract with petitioner, we agree with
the appellate court that they were not to be blammed. First,  within the option period, or on 4 August 1978, it was
respondent spouses and not petitioner who initiated the meeting at the Office of The Register of Deeds of
Makati. Second, that the Ramoses filed to appear on 4 August 1978 was beyond the control of respondent
spouses. Third, the succeeding meetings that transpired to consummate the contract were all beyond the option period and,
as declared by the Court of Appeals, the question of who was at fault was already immaterial. Fourth, even assuming that
the meetings were within the option period, the presence of petitioner was not enough as she was not even prepared to pay
the purchase price in cash as agreed upon. Finally,  even without the presence of the Ramoses, petitioner could have easily
made the necessary payment in cash as the price of the property was already set at P34.00 per square meter and payment of
the mortgage could every well be left to respondent spouses.

Petitioner further claims that when respondent spouses sent her a telegram demanding full payment of the purchase price on
14 September 1978 it was an acknowledgment of their contract to sell, thus denying them the right to claim otherwise.

We do not agree. As explained above, there was no contract to sell between petitioner and respondent spouses to speak of.
Verily, the telegram could not operate to estop them from claiming that there was such contract between them and
petitioner. Neither could it mean that respondent spouses extended the option period. The telegram only showed that
respondent spouses were willing to give petitioner a chance to buy subject property even if it no longer exclusive.

The option period having expired and acceptance was not effectively made by petitioner, the purchase of subject property
by respondent SUNVAR was perfectly valid and entered into in good faith. Petitioner claims that in August 1978
Hermigildo Sanchez, the son of respondent spouses’ agent, Marcosa Snachez, informed Marixi Prieto, a member of the
Board of Directors of respondent SUNVAR, that the property was already sold to petitioner. Also, petitioner maintains that
on 5 September 1978 respondent Cuenca met with her and offered to buy the property from her at P45.00 per square meter.
Petitioner contends that these incidents, including the annotation of her Adverse Claim on the title of subject property on 15
September 1978 show that respondent SUNVAR was aware of the perfected sale between her and respondent spouses, thus
making respondent SUNVAR a buyer in bad faith.

Petitioner is not correct. The dates mentioned, at least 5 and 15 September 1978, are immaterial as they were beyond the
option period given to petitioner. On the other hand, the referral to sometime in August 1978 in the testimony of Hermigildo
Sanchez as emphasized by petitioner in her petition is very vague. It could be within or beyond the option period. Clearly
then, even assuming that the meeting with Marixi Prieto actually transpired, it could not necessarily mean that she knew of
the agreement between petitioner and respondent spouses for the purchase of subject property as the meeting could have
occurred beyond the option period. In which case, no bad faith could be attributed to respondent SUNVAR. If, on the other
hand, the meeting was within the option period, petitioner was remiss in her duty to prove so. Necessarily, we are left with

38
the conclusion that respondent SUNVAR bought subject property from respondent spouses in good faith, for value and
without knowledge of any flaw or defect in its title.

The appellate court awarded nominal and exemplary damages plus attorney’s fees to respondent spouses and respondent
SUNVAR. But nominal damages are adjudicated to vindicate or recognize the right of the plaintiff that has been violated or
invaded by the defendant. In the instant case, the Court recognizes the rights of all the parties and finds no violation or
19 

invasion of the rights of respondents by petitioner. Petitioner, in filing her complaint, only seeks relief, in good faith, for
what she believes she was entitled to and should not be awarded to respondents as they are imposed only by way of example
or correction for the public good and only in addition to the moral, temperate, liquidated or compensatory damages. No20 

such kinds of damages were awarded by the Court of Appeals, only nominal, which was not justified in this case. Finally,
attorney’s fees could not also be recovered as the Court does not deem it just and equitable under the circumtances.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals ordering the Register of Deeds of Makati
City to lift the adverse claim and such other encumbrances petitioners Lourdes Ong Limson may have filed or caused to be
annotated on TCT No. S-75377 is AFFIRMED, with the MODIFICATION that the award of nominal and exemplary
damages as well as attorney’s fees is DELETED.

SO ORDERED.

Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. 106063 November 21, 1996

EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN, INC., petitioners,

vs.

MAYFAIR THEATER, INC., respondent.

HERMOSISIMA, JR., J.:

Before us is a petition for review of the decision 1 of the Court of

Appeals2 involving questions in the resolution of which the respondent appellate court analyzed and interpreted
particular provisions of our laws on contracts and sales. In its assailed decision, the respondent court reversed the trial
court3 which, in dismissing the complaint for specific performance with damages and annulment of contract, 4 found
the option clause in the lease contracts entered into by private respondent Mayfair Theater, Inc. (hereafter, Mayfair)
and petitioner Carmelo & Bauermann, Inc. (hereafter, Carmelo) to be impossible of performance and unsupported by
a consideration and the subsequent sale of the subject property to petitioner Equatorial Realty Development, Inc.
(hereafter, Equatorial) to have been made without any breach of or prejudice to, the said lease contracts. 5

We reproduce below the facts as narrated by the respondent court, which narration, we note, is almost verbatim the
basis of the statement of facts as rendered by the petitioners in their pleadings:

Carmelo owned a parcel of land, together with two 2-storey buildings constructed thereon located at Claro M Recto
Avenue, Manila, and covered by TCT No. 18529 issued in its name by the Register of Deeds of Manila.

On June 1, 1967 Carmelo entered into a contract of lease with Mayfair for the latter's lease of a portion of Carmelo's
property particularly described, to wit:

39
A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto Avenue, Manila, with a
floor area of 1,610 square meters.

THE SECOND FLOOR AND MEZZANINE of the two-storey building, situated at C.M. Recto Avenue, Manila, with
a floor area of 150 square meters.

for use by Mayfair as a motion picture theater and for a term of twenty (20) years. Mayfair thereafter constructed on
the leased property a movie house known as "Maxim Theatre."

Two years later, on March 31, 1969, Mayfair entered into a second contract of lease with Carmelo for the lease of
another portion of Carmelo's property, to wit:

A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto Avenue, Manila, with a
floor area of 1,064 square meters.

THE TWO (2) STORE SPACES AT THE GROUND FLOOR and MEZZANINE of the two-storey building situated
at C.M. Recto Avenue, Manila, with a floor area of 300 square meters and bearing street numbers 1871 and 1875,

for similar use as a movie theater and for a similar term of twenty (20) years. Mayfair put up another movie house
known as "Miramar Theatre" on this leased property.

Both contracts of lease provides (sic) identically worded paragraph 8, which reads:

That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive option to
purchase the same.

In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is bound and
obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale hereof that the purchaser shall
recognize this lease and be bound by all the terms and conditions thereof.

Sometime in August 1974, Mr. Henry Pascal of Carmelo informed Mr. Henry Yang, President of Mayfair, through a
telephone conversation that Carmelo was desirous of selling the entire Claro M. Recto property. Mr. Pascal told Mr.
Yang that a certain Jose Araneta was offering to buy the whole property for US Dollars 1,200,000 , and Mr. Pascal
asked Mr. Yang if the latter was willing to buy the property for Six to Seven Million Pesos.

Mr. Yang replied that he would let Mr. Pascal know of his decision. On August 23, 1974, Mayfair replied through a
letter stating as follows:

It appears that on August 19, 1974 your Mr. Henry Pascal informed our client's Mr. Henry Yang through the telephone
that your company desires to sell your above-mentioned C.M. Recto Avenue property.

Under your company's two lease contracts with our client, it is uniformly provided:

8. That if the LESSOR should desire to sell the leased premises the LESSEE shall be given 30-days exclusive option
to purchase the same. In the event, however, that the leased premises is sold to someone other than the LESSEE, the
LESSOR is bound and obligated, as it is (sic) herebinds (sic) and obligates itself, to stipulate in the Deed of Sale
thereof that the purchaser shall recognize this lease and be bound by all the terms and conditions hereof (sic).

Carmelo did not reply to this letter.

On September 18, 1974, Mayfair sent another letter to Carmelo purporting to express interest in acquiring not only the
leased premises but "the entire building and other improvements if the price is reasonable. However, both Carmelo
and Equatorial questioned the authenticity of the second letter.

Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto Avenue land and building, which included the
leased premises housing the "Maxim" and "Miramar" theatres, to Equatorial by virtue of a Deed of Absolute Sale, for
the total sum of P11,300,000.00.

In September 1978, Mayfair instituted the action a quo for specific performance and annulment of the sale of the
leased premises to Equatorial. In its Answer, Carmelo alleged as special and affirmative defense (a) that it had
informed Mayfair of its desire to sell the entire C.M. Recto Avenue property and offered the same to Mayfair, but the
40
latter answered that it was interested only in buying the areas under lease, which was impossible since the property
was not a condominium; and (b) that the option to purchase invoked by Mayfair is null and void for lack of
consideration. Equatorial, in its Answer, pleaded as special and affirmative defense that the option is void for lack of
consideration (sic) and is unenforceable by reason of its impossibility of performance because the leased premises
could not be sold separately from the other portions of the land and building. It counterclaimed for cancellation of the
contracts of lease, and for increase of rentals in view of alleged supervening extraordinary devaluation of the currency .
Equatorial likewise cross-claimed against co-defendant Carmelo for indemnification in respect of Mayfair's claims.

During the pre-trial conference held on January 23, 1979, the parties stipulated on the following:

1. That there was a deed of sale of the contested premises by the defendant Carmelo . . . in favor of defendant
Equatorial . . .;

2. That in both contracts of lease there appear (sic) the stipulation granting the plaintiff exclusive option to purchase
the leased premises should the lessor desire to sell the same (admitted subject to the contention that the stipulation is
null and void);

3. That the two buildings erected on this land are not of the condominium plan;

4. That the amounts stipulated and mentioned in paragraphs 3 (a) and (b) of the contracts of lease constitute the
consideration for the plaintiff's occupancy of the leased premises, subject of the same contracts of lease, Exhibits A
and B;

xxx xxx xxx

6. That there was no consideration specified in the option to buy embodied in the contract;

7. That Carmelo & Bauermann owned the land and the two buildings erected thereon;

8. That the leased premises constitute only the portions actually occupied by the theaters; and

9. That what was sold by Carmelo & Bauermann to defendant Equatorial Realty is the land and the two buildings
erected thereon.

xxx xxx xxx

After assessing the evidence, the court a quo rendered the appealed decision, the decretal portion of which reads as
follows:

WHEREFORE, judgment is hereby rendered:

(1) Dismissing the complaint with costs against the plaintiff;

(2) Ordering plaintiff to pay defendant Carmelo & Bauermann P40,000.00 by way of attorney's fees on its
counterclaim;

(3) Ordering plaintiff to pay defendant Equatorial Realty P35,000.00 per month as reasonable compensation for the
use of areas not covered by the contract (sic) of lease from July 31, 1979 until plaintiff vacates said area (sic) plus
legal interest from July 31, 1978; P70,000 00 per month as reasonable compensation for the use of the premises
covered by the contracts (sic) of lease dated (June 1, 1967 from June 1, 1987 until plaintiff vacates the premises plus
legal interest from June 1, 1987; P55,000.00 per month as reasonable compensation for the use of the premises
covered by the contract of lease dated March 31, 1969 from March 30, 1989 until plaintiff vacates the premises plus
legal interest from March 30, 1989; and P40,000.00 as attorney's fees;

(4) Dismissing defendant Equatorial's crossclaim against defendant Carmelo & Bauermann.

The contracts of lease dated June 1, 1967 and March 31, 1969 are declared expired and all persons claiming rights
under these contracts are directed to vacate the premises. 6

The trial court adjudged the identically worded paragraph 8 found in both aforecited lease contracts to be an option
clause which however cannot be deemed to be binding on Carmelo because of lack of distinct consideration therefor.
41
The court a quo ratiocinated:

Significantly, during the pre-trial, it was admitted by the parties that the option in the contract of lease is not supported
by a separate consideration. Without a consideration, the option is therefore not binding on defendant Carmelo &
Bauermann to sell the C.M. Recto property to the former. The option invoked by the plaintiff appears in the contracts
of lease . . . in effect there is no option, on the ground that there is no consideration. Article 1352 of the Civil Code ,
provides:

Contracts without cause or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to
law, morals, good custom, public order or public policy.

Contracts therefore without consideration produce no effect whatsoever. Article 1324 provides:

When the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before
acceptance by communicating such withdrawal, except when the option is founded upon consideration, as something
paid or promised.

in relation with Article 1479 of the same Code:

A promise to buy and sell a determine thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determine thing for a price certain is binding upon the promissor if
the promise is supported by a consideration distinct from the price.

The plaintiff cannot compel defendant Carmelo to comply with the promise unless the former establishes the existence
of a distinct consideration. In other words, the promisee has the burden of proving the consideration. The
consideration cannot be presumed as in Article 1354:

Although the cause is not stated in the contract, it is presumed that it exists and is lawful unless the debtor proves the
contrary.

where consideration is legally presumed to exists. Article 1354 applies to contracts in general, whereas when it comes
to an option it is governed particularly and more specifically by Article 1479 whereby the promisee has the burden of
proving the existence of consideration distinct from the price. Thus, in the case of Sanchez vs. Rigor, 45 SCRA 368,
372-373, the Court said:

(1) Article 1354 applies to contracts in general, whereas the second paragraph of Article 1479 refers to sales in
particular, and, more specifically, to an accepted unilateral promise to buy or to sell. In other words, Article 1479 is
controlling in the case at bar.

(2) In order that said unilateral promise may be binding upon the promissor, Article 1479 requires the concurrence of a
condition, namely, that the promise be supported by a consideration distinct from the price.

Accordingly, the promisee cannot compel the promissor to comply with the promise, unless the former establishes the
existence of said distinct consideration. In other words, the promisee has the burden of proving such consideration.
Plaintiff herein has not even alleged the existence thereof in his complaint. 7

It follows that plaintiff cannot compel defendant Carmelo & Bauermann to sell the C.M. Recto property to the former.

Mayfair taking exception to the decision of the trial court, the battleground shifted to the respondent Court of Appeals.
Respondent appellate court reversed the court a quo and rendered judgment:

1. Reversing and setting aside the appealed Decision;

2. Directing the plaintiff-appellant Mayfair Theater Inc. to pay and return to Equatorial the amount of P11,300,000.00
within fifteen (15) days from notice of this Decision, and ordering Equatorial Realty Development, Inc. to accept such
payment;

3. Upon payment of the sum of P11,300,000, directing Equatorial Realty Development, Inc. to execute the deeds and
documents necessary for the issuance and transfer of ownership to Mayfair of the lot registered under TCT Nos.
17350, 118612, 60936, and 52571; and
42
4. Should plaintiff-appellant Mayfair Theater, Inc. be unable to pay the amount as adjudged, declaring the Deed of
Absolute Sale between the defendants-appellants Carmelo & Bauermann, Inc. and Equatorial Realty Development,
Inc. as valid and binding upon all the parties.8

Rereading the law on the matter of sales and option contracts, respondent Court of Appeals differentiated between
Article 1324 and Article 1479 of the Civil Code, analyzed their application to the facts of this case, and concluded that
since paragraph 8 of the two lease contracts does not state a fixed price for the purchase of the leased premises, which
is an essential element for a contract of sale to be perfected, what paragraph 8 is, must be a right of first refusal and
not an option contract. It explicated:

Firstly, the court a quo misapplied the provisions of Articles 1324 and 1479, second paragraph, of the Civil Code.

Article 1324 speaks of an "offer" made by an offeror which the offeree may or may not accept within a certain period.
Under this article, the offer may be withdrawn by the offeror before the expiration of the period and while the offeree
has not yet accepted the offer. However, the offer cannot be withdrawn by the offeror within the period if a
consideration has been promised or given by the offeree in exchange for the privilege of being given that period
within which to accept the offer. The consideration is distinct from the price which is part of the offer. The contract
that arises is known as option. In the case of Beaumont vs. Prieto, 41 Phil. 670, the Supreme court, citing Bouvier,
defined an option as follows: "A contract by virtue of which A, in consideration of the payment of a certain sum to B,
acquires the privilege of buying from or selling to B, certain securities or properties within a limited time at a
specified price," (pp. 686-7).

Article 1479, second paragraph, on the other hand, contemplates of an "accepted unilateral promise to buy or to sell a
determinate thing for a price within (which) is binding upon the promisee if the promise is supported by a
consideration distinct from the price." That "unilateral promise to buy or to sell a determinate thing for a price certain"
is called an offer. An "offer", in laws, is a proposal to enter into a contract (Rosenstock vs. Burke, 46 Phil. 217). To
constitute a legal offer, the proposal must be certain as to the object, the price and other essential terms of the contract
(Art. 1319, Civil Code).

Based on the foregoing discussion, it is evident that the provision granting Mayfair "30-days exclusive option to
purchase" the leased premises is NOT AN OPTION in the context of Arts. 1324 and 1479, second paragraph, of the
Civil Code. Although the provision is certain as to the object (the sale of the leased premises) the price for which the
object is to be sold is not stated in the provision Otherwise stated, the questioned stipulation is not by itself, an
"option" or the "offer to sell" because the clause does not specify the price for the subject property.

Although the provision giving Mayfair "30-days exclusive option to purchase" cannot be legally categorized as an
option, it is, nevertheless, a valid and binding stipulation. What the trial court failed to appreciate was the intention of
the parties behind the questioned proviso.

xxx xxx xxx

The provision in question is not of the pro-forma type customarily found in a contract of lease. Even appellees have
recognized that the stipulation was incorporated in the two Contracts of Lease at the initiative and behest of Mayfair.
Evidently, the stipulation was intended to benefit and protect Mayfair in its rights as lessee in case Carmelo should
decide, during the term of the lease, to sell the leased property. This intention of the parties is achieved in two ways in
accordance with the stipulation. The first is by giving Mayfair "30-days exclusive option to purchase" the leased
property. The second is, in case Mayfair would opt not to purchase the leased property, "that the purchaser (the new
owner of the leased property) shall recognize the lease and be bound by all the terms and conditions thereof."

In other words, paragraph 8 of the two Contracts of lease, particularly the stipulation giving Mayfair "30-days
exclusive option to purchase the (leased premises)," was meant to provide Mayfair the opportunity to purchase and
acquire the leased property in the event that Carmelo should decide to dispose of the property. In order to realize this
intention, the implicit obligation of Carmelo once it had decided to sell the leased property, was not only to notify
Mayfair of such decision to sell the property, but, more importantly, to make an offer to sell the leased premises to
Mayfair, giving the latter a fair and reasonable opportunity to accept or reject the offer, before offering to sell or
selling the leased property to third parties. The right vested in Mayfair is analogous to the right of first refusal, which
means that Carmelo should have offered the sale of the leased premises to Mayfair before offering it to other parties,
or, if Carmelo should receive any offer from third parties to purchase the leased premises, then Carmelo must first
give Mayfair the opportunity to match that offer.

43
In fact, Mr. Pascal understood the provision as giving Mayfair a right of first refusal when he made the telephone call
to Mr. Yang in 1974. Mr. Pascal thus testified:

Q Can you tell this Honorable Court how you made the offer to Mr. Henry Yang by telephone?

A I have an offer from another party to buy the property and having the offer we decided to make an offer to Henry
Yang on a first-refusal basis. (TSN November 8, 1983, p. 12.).

and on cross-examination:

Q When you called Mr. Yang on August 1974 can you remember exactly what you have told him in connection with
that matter, Mr. Pascal?

A More or less, I told him that I received an offer from another party to buy the property and I was offering him first
choice of the enter property. (TSN, November 29, 1983, p. 18).

We rule, therefore, that the foregoing interpretation best renders effectual the intention of the parties. 9

Besides the ruling that paragraph 8 vests in Mayfair the right of first refusal as to which the requirement of distinct
consideration indispensable in an option contract, has no application, respondent appellate court also addressed the
claim of Carmelo and Equatorial that assuming arguendo that the option is valid and effective, it is impossible of
performance because it covered only the leased premises and not the entire Claro M. Recto property, while Carmelo's
offer to sell pertained to the entire property in question. The Court of Appeals ruled as to this issue in this wise:

We are not persuaded by the contentions of the defendants-appellees. It is to be noted that the Deed of Absolute Sale
between Carmelo and Equatorial covering the whole Claro M. Recto property, made reference to four titles: TCT Nos.
17350, 118612, 60936 and 52571. Based on the information submitted by Mayfair in its appellant's Brief (pp. 5 and
46) which has not been controverted by the appellees, and which We, therefore, take judicial notice of the two theaters
stand on the parcels of land covered by TCT No. 17350 with an area of 622.10 sq. m and TCT No. 118612 with an
area of 2,100.10 sq. m. The existence of four separate parcels of land covering the whole Recto property demonstrates
the legal and physical possibility that each parcel of land, together with the buildings and improvements thereof, could
have been sold independently of the other parcels.

At the time both parties executed the contracts, they were aware of the physical and structural conditions of the
buildings on which the theaters were to be constructed in relation to the remainder of the whole Recto property. The
peculiar language of the stipulation would tend to limit Mayfair's right under paragraph 8 of the Contract of Lease to
the acquisition of the leased areas only. Indeed, what is being contemplated by the questioned stipulation is a
departure from the customary situation wherein the buildings and improvements are included in and form part of the
sale of the subjacent land. Although this situation is not common, especially considering the non-condominium nature
of the buildings, the sale would be valid and capable of being performed. A sale limited to the leased premises only, if
hypothetically assumed, would have brought into operation the provisions of co-ownership under which Mayfair
would have become the exclusive owner of the leased premises and at the same time a co-owner with Carmelo of the
subjacent land in proportion to Mayfair's interest over the premises sold to it. 10

Carmelo and Equatorial now comes before us questioning the correctness and legal basis for the decision of
respondent Court of Appeals on the basis of the following assigned errors:

THE COURT OF APPEALS GRAVELY ERRED IN CONCLUDING THAT THE OPTION CLAUSE IN THE
CONTRACTS OF LEASE IS ACTUALLY A RIGHT OF FIRST REFUSAL PROVISO. IN DOING SO THE
COURT OF APPEALS DISREGARDED THE CONTRACTS OF LEASE WHICH CLEARLY AND
UNEQUIVOCALLY PROVIDE FOR AN OPTION, AND THE ADMISSION OF THE PARTIES OF SUCH
OPTION IN THEIR STIPULATION OF FACTS.

II

WHETHER AN OPTION OR RIGHT OF FIRST REFUSAL, THE COURT OF APPEALS ERRED IN DIRECTING
EQUATORIAL TO EXECUTE A DEED OF SALE EIGHTEEN (18) YEARS AFTER MAYFAIR FAILED TO

44
EXERCISE ITS OPTION (OR, EVEN ITS RIGHT OF FIRST REFUSAL ASSUMING IT WAS ONE) WHEN THE
CONTRACTS LIMITED THE EXERCISE OF SUCH OPTION TO 30 DAYS FROM NOTICE.

III

THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DIRECTED IMPLEMENTATION OF ITS

DECISION EVEN BEFORE ITS FINALITY, AND WHEN IT GRANTED MAYFAIR A RELIEF THAT WAS NOT
EVEN PRAYED FOR IN THE COMPLAINT.

IV

THE COURT OF APPEALS VIOLATED ITS OWN INTERNAL RULES IN THE ASSIGNMENT OF APPEALED
CASES WHEN IT ALLOWED THE SAME DIVISION XII, PARTICULARLY JUSTICE MANUEL HERRERA,
TO RESOLVE ALL THE MOTIONS IN THE "COMPLETION PROCESS" AND TO STILL RESOLVE THE
MERITS OF THE CASE IN THE "DECISION STAGE".11

We shall first dispose of the fourth assigned error respecting alleged irregularities in the raffle of this case in the Court
of Appeals. Suffice it to say that in our Resolution, 12 dated December 9, 1992, we already took note of this matter and
set out the proper applicable procedure to be the following:

On September 20, 1992, counsel for petitioner Equatorial Realty Development, Inc. wrote a letter-complaint to this
Court alleging certain irregularities and infractions committed by certain lawyers, and Justices of the Court of Appeals
and of this Court in connection with case CA-G.R. CV No. 32918 (now G.R. No. 106063). This partakes of the nature
of an administrative complaint for misconduct against members of the judiciary. While the letter-complaint arose as
an incident in case CA-G.R. CV No. 32918 (now G.R. No. 106063), the disposition thereof should be separate and
independent from Case G.R. No. 106063. However, for purposes of receiving the requisite pleadings necessary in
disposing of the administrative complaint, this Division shall continue to have control of the case. Upon completion
thereof, the same shall be referred to the Court En Banc for proper disposition.13

This court having ruled the procedural irregularities raised in the fourth assigned error of Carmelo and Equatorial, to
be an independent and separate subject for an administrative complaint based on misconduct by the lawyers and
justices implicated therein, it is the correct, prudent and consistent course of action not to pre-empt the administrative
proceedings to be undertaken respecting the said irregularities. Certainly, a discussion thereupon by us in this case
would entail a finding on the merits as to the real nature of the questioned procedures and the true intentions and
motives of the players therein.

In essence, our task is two-fold: (1) to define the true nature, scope and efficacy of paragraph 8 stipulated in the two
contracts of lease between Carmelo and Mayfair in the face of conflicting findings by the trial court and the Court of
Appeals; and (2) to determine the rights and obligations of Carmelo and Mayfair, as well as Equatorial, in the
aftermath of the sale by Carmelo of the entire Claro M. Recto property to Equatorial.

Both contracts of lease in question provide the identically worded paragraph 8, which reads:

That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days exclusive option to
purchase the same.

In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR is bound and
obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale thereof that the purchaser shall
recognize this lease and be bound by all the terms and conditions thereof. 14

We agree with the respondent Court of Appeals that the aforecited contractual stipulation provides for a right of first
refusal in favor of Mayfair. It is not an option clause or an option contract. It is a contract of a right of first refusal.

As early as 1916, in the case of Beaumont vs. Prieto,15 unequivocal was our characterization of an option contract as
one necessarily involving the choice granted to another for a distinct and separate consideration as to whether or not to
purchase a determinate thing at a predetermined fixed price.

45
It is unquestionable that, by means of the document Exhibit E, to wit, the letter of December 4, 1911, quoted at the
beginning of this decision, the defendant Valdes granted to the plaintiff Borck the right to purchase the Nagtajan
Hacienda belonging to Benito Legarda, during the period of three months and for its assessed valuation, a grant which
necessarily implied the offer or obligation on the part of the defendant Valdes to sell to Borck the said hacienda during
the period and for the price mentioned . . . There was, therefore, a meeting of minds on the part of the one and the
other, with regard to the stipulations made in the said document. But it is not shown that there was any cause or
consideration for that agreement, and this omission is a bar which precludes our holding that the stipulations contained
in Exhibit E is a contract of option, for, . . . there can be no contract without the requisite, among others, of the cause
for the obligation to be established.

In his Law Dictionary, edition of 1897, Bouvier defines an option as a contract, in the following language:

A contract by virtue of which A, in consideration of the payment of a certain sum to B, acquires the privilege of
buying from, or selling to B, certain securities or properties within a limited time at a specified price. (Story vs.
Salamon, 71 N.Y., 420.)

From vol. 6, page 5001, of the work "Words and Phrases," citing the case of Ide vs. Leiser (24 Pac., 695; 10 Mont., 5;
24 Am. St. Rep., 17) the following quotation has been taken:

An agreement in writing to give a person the option to purchase lands within a given time at a named price is neither a
sale nor an agreement to sell. It is simply a contract by which the owner of property agrees with another person that he
shall have the right to buy his property at a fixed price within a certain time. He does not sell his land; he does not
then agree to sell it; but he does sell something; that is, the right or privilege to buy at the election or option of the
other party. The second party gets in praesenti, not lands, nor an agreement that he shall have lands, but he does get
something of value; that is, the right to call for and receive lands if he elects. The owner parts with his right to sell his
lands, except to the second party, for a limited period. The second party receives this right, or, rather, from his point of
view, he receives the right to elect to buy.

But the two definitions above cited refer to the contract of option, or, what amounts to the same thing, to the case
where there was cause or consideration for the obligation, the subject of the agreement made by the parties; while in
the case at bar there was no such cause or consideration. 16 (Emphasis ours.)

The rule so early established in this jurisdiction is that the deed of option or the option clause in a contract, in order to
be valid and enforceable, must, among other things, indicate the definite price at which the person granting the option,
is willing to sell.

Notably, in one case we held that the lessee loses his right to buy the leased property for a named price per square
meter upon failure to make the purchase within the time specified; 17 in one other case we freed the landowner from her
promise to sell her land if the prospective buyer could raise P4,500.00 in three weeks because such option was not
supported by a distinct consideration; 18 in the same vein in yet one other case, we also invalidated an instrument
entitled, "Option to Purchase" a parcel of land for the sum of P1,510.00 because of lack of consideration; 19 and as an
exception to the doctrine enumerated in the two preceding cases, in another case, we ruled that the option to buy the
leased premises for P12,000.00 as stipulated in the lease contract, is not without consideration for in reciprocal
contracts, like lease, the obligation or promise of each party is the consideration for that of the other. 20 In all these
cases, the selling price of the object thereof is always predetermined and specified in the option clause in the contract
or in the separate deed of option. We elucidated, thus, in the very recent case of Ang Yu Asuncion vs. Court of
Appeals21 that:

. . . In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is perfected
when a person, called the seller, obligates himself, for a price certain, to deliver and to transfer ownership of a thing or
right to another, called the buyer, over which the latter agrees. Article 1458 of the Civil Code provides:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to
deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.

A contract of sale may be absolute or conditional.

When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the ownership of the
thing sold in retained until the fulfillment of a positive suspensive condition (normally, the full payment of the

46
purchase price), the breach of the condition will prevent the obligation to convey title from acquiring an obligatory
force. . . .

An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is fixed, can
be obligatory on the parties, and compliance therewith may accordingly be exacted.

An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a
valuable consideration distinct and separate from the price, is what may properly be termed a perfected contract of
option. This contract is legally binding, and in sales, it conforms with the second paragraph of Article 1479 of the
Civil Code, viz:

Art. 1479. . . .

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promisor if
the promise is supported by a consideration distinct from the price. (1451a).

Observe, however, that the option is not the contract of sale itself. The optionee has the right, but not the obligation, to
buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the option, a bilateral promise to
sell and to buy ensues and both parties are then reciprocally bound to comply with their respective undertakings.

Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely
an offer. Public advertisements or solicitations and the like are ordinarily construed as mere invitations to make offers
or only as proposals. These relations, until a contract is perfected, are not considered binding commitments. Thus, at
any time prior to the perfection of the contract, either negotiating party may stop the negotiation . The offer, at this
stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and
not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given to
the offeree within which to accept the offer, the following rules generally govern:

(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to
withdraw the offer before its acceptance, or if an acceptance has been made, before the offeror's coming to know of
such fact, by communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co.
vs. Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell under Art. 1479, modifying
the previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural
Bank of Parañaque, Inc. vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw,
however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under
Article 19 of the Civil Code which ordains that "every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe honesty and good faith."

(2) If the period has a separate consideration, a contract of "option" deemed perfected, and it would be a breach of that
contract to withdraw the offer during the agreed period. The option, however, is an independent contract by itself; and
it is to be distinguished from the projected main agreement (subject matter of the option) which is obviously yet to be
concluded. If, in fact, the optioner-offeror withdraws the offer before its acceptance (exercise of the option) by the
optionee-offeree, the latter may not sue for specific performance on the proposed contract ("object" of the option)
since it has failed to reach its own stage of perfection. The optioner-offeror, however, renders himself liable for
damages for breach of the opinion. . .

In the light of the foregoing disquisition and in view of the wording of the questioned provision in the two lease
contracts involved in the instant case, we so hold that no option to purchase in contemplation of the second paragraph
of Article 1479 of the Civil Code, has been granted to Mayfair under the said lease contracts.

Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the right of first refusal to Mayfair and is
not an option contract. It also correctly reasoned that as such, the requirement of a separate consideration for the
option, has no applicability in the instant case.

There is nothing in the identical Paragraphs "8" of the June 1, 1967 and March 31, 1969 contracts which would bring
them into the ambit of the usual offer or option requiring an independent consideration.

An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price. It is a
separate and distinct contract from that which the parties may enter into upon the consummation of the option. It must

47
be supported by consideration.22 In the instant case, the right of first refusal is an integral part of the contracts of lease.
The consideration is built into the reciprocal obligations of the parties.

To rule that a contractual stipulation such as that found in paragraph 8 of the contracts is governed by Article 1324 on
withdrawal of the offer or Article 1479 on promise to buy and sell would render in effectual or "inutile" the provisions
on right of first refusal so commonly inserted in leases of real estate nowadays. The Court of Appeals is correct in
stating that Paragraph 8 was incorporated into the contracts of lease for the benefit of Mayfair which wanted to be
assured that it shall be given the first crack or the first option to buy the property at the price which Carmelo is willing
to accept. It is not also correct to say that there is no consideration in an agreement of right of first refusal. The
stipulation is part and parcel of the entire contract of lease. The consideration for the lease includes the consideration
for the right of first refusal. Thus, Mayfair is in effect stating that it consents to lease the premises and to pay the price
agreed upon provided the lessor also consents that, should it sell the leased property, then, Mayfair shall be given the
right to match the offered purchase price and to buy the property at that price. As stated in Vda. De Quirino vs.
Palarca,23 in reciprocal contract, the obligation or promise of each party is the consideration for that of the other.

The respondent Court of Appeals was correct in ascertaining the true nature of the aforecited paragraph 8 to be that of
a contractual grant of the right of first refusal to Mayfair.

We shall now determine the consequential rights, obligations and liabilities of Carmelo, Mayfair and Equatorial.

The different facts and circumstances in this case call for an amplification of the precedent in Ang Yu Asuncion vs.
Court of Appeals.24

First and foremost is that the petitioners acted in bad faith to render Paragraph 8 "inutile".

What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that Mayfair will have the right of
first refusal in the event Carmelo sells the leased premises. It is undisputed that Carmelo did recognize this right of
Mayfair, for it informed the latter of its intention to sell the said property in 1974. There was an exchange of letters
evidencing the offer and counter-offers made by both parties. Carmelo, however, did not pursue the exercise to its
logical end. While it initially recognized Mayfair's right of first refusal, Carmelo violated such right when without
affording its negotiations with Mayfair the full process to ripen to at least an interface of a definite offer and a possible
corresponding acceptance within the "30-day exclusive option" time granted Mayfair, Carmelo abandoned
negotiations, kept a low profile for some time, and then sold, without prior notice to Mayfair, the entire Claro M Recto
property to Equatorial.

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question rescissible. We
agree with respondent Appellate Court that the records bear out the fact that Equatorial was aware of the lease
contracts because its lawyers had, prior to the sale, studied the said contracts. As such, Equatorial cannot tenably claim
to be a purchaser in good faith, and, therefore, rescission lies.

. . . Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a contract
otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors. The
status of creditors could be validly accorded the Bonnevies for they had substantial interests that were prejudiced by
the sale of the subject property to the petitioner without recognizing their right of first priority under the Contract of
Lease.

According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third persons , to
secure reparation for damages caused to them by a contract, even if this should be valid, by means of the restoration of
things to their condition at the moment prior to the celebration of said contract. It is a relief allowed for the protection
of one of the contracting parties and even third persons from all injury and damage the contract may cause, or to
protect some incompatible and preferent right created by the contract. Rescission implies a contract which, even if
initially valid, produces a lesion or pecuniary damage to someone that justifies its invalidation for reasons of equity.

It is true that the acquisition by a third person of the property subject of the contract is an obstacle to the action for its
rescission where it is shown that such third person is in lawful possession of the subject of the contract and that he did
not act in bad faith. However, this rule is not applicable in the case before us because the petitioner is not considered a
third party in relation to the Contract of Sale nor may its possession of the subject property be regarded as acquired
lawfully and in good faith.

48
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover, the petitioner cannot be deemed
a purchaser in good faith for the record shows that it categorically admitted it was aware of the lease in favor of the
Bonnevies, who were actually occupying the subject property at the time it was sold to it. Although the Contract of
Lease was not annotated on the transfer certificate of title in the name of the late Jose Reynoso and Africa Reynoso,
the petitioner cannot deny actual knowledge of such lease which was equivalent to and indeed more binding than
presumed notice by registration.

A purchaser in good faith and for value is one who buys the property of another without notice that some other person
has a right to or interest in such property and pays a full and fair price for the same at the time of such purchase or
before he has notice of the claim or interest of some other person in the property. Good faith connotes an honest
intention to abstain from taking unconscientious advantage of another. Tested by these principles, the petitioner
cannot tenably claim to be a buyer in good faith as it had notice of the lease of the property by the Bonnevies and such
knowledge should have cautioned it to look deeper into the agreement to determine if it involved stipulations that
would prejudice its own interests.

The petitioner insists that it was not aware of the right of first priority granted by the Contract of Lease. Assuming this
to be true, we nevertheless agree with the observation of the respondent court that:

If Guzman-Bocaling failed to inquire about the terms of the Lease Contract, which includes Par. 20 on priority right
given to the Bonnevies, it had only itself to blame. Having known that the property it was buying was under lease, it
behooved it as a prudent person to have required Reynoso or the broker to show to it the Contract of Lease in which
Par. 20 is contained.25

Petitioners assert the alleged impossibility of performance because the entire property is indivisible property. It was
petitioner Carmelo which fixed the limits of the property it was leasing out. Common sense and fairness dictate that
instead of nullifying the agreement on that basis, the stipulation should be given effect by including the indivisible
appurtenances in the sale of the dominant portion under the right of first refusal. A valid and legal contract where the
ascendant or the more important of the two parties is the landowner should be given effect, if possible, instead of
being nullified on a selfish pretext posited by the owner. Following the arguments of petitioners and the participation
of the owner in the attempt to strip Mayfair of its rights, the right of first refusal should include not only the property
specified in the contracts of lease but also the appurtenant portions sold to Equatorial which are claimed by petitioners
to be indivisible. Carmelo acted in bad faith when it sold the entire property to Equatorial without informing Mayfair,
a clear violation of Mayfair's rights. While there was a series of exchanges of letters evidencing the offer and counter-
offers between the parties, Carmelo abandoned the negotiations without giving Mayfair full opportunity to negotiate
within the 30-day period.

Accordingly, even as it recognizes the right of first refusal, this Court should also order that Mayfair be authorized to
exercise its right of first refusal under the contract to include the entirety of the indivisible property. The boundaries of
the property sold should be the boundaries of the offer under the right of first refusal. As to the remedy to enforce
Mayfair's right, the Court disagrees to a certain extent with the concluding part of the dissenting opinion of Justice
Vitug. The doctrine enunciated in Ang Yu Asuncion vs. Court of Appeals should be modified, if not amplified under
the peculiar facts of this case.

As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad faith, since it
was knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In fact , as correctly observed
by the Court of Appeals, Equatorial admitted that its lawyers had studied the contract of lease prior to the sale.
Equatorial's knowledge of the stipulations therein should have cautioned it to look further into the agreement to
determine if it involved stipulations that would prejudice its own interests.

Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is first set aside or
rescinded. All of these matters are now before us and so there should be no piecemeal determination of this case and
leave festering sores to deteriorate into endless litigation. The facts of the case and considerations of justice and equity
require that we order rescission here and now. Rescission is a relief allowed for the protection of one of the
contracting parties and even third persons from all injury and damage the contract may cause or to protect some
incompatible and preferred right by the contract. 26 The sale of the subject real property by Carmelo to Equatorial
should now be rescinded considering that Mayfair, which had substantial interest over the subject property, was
prejudiced by the sale of the subject property to Equatorial without Carmelo conferring to Mayfair every opportunity
to negotiate within the 30-day stipulated period.27

49
This Court has always been against multiplicity of suits where all remedies according to the facts and the law can be
included. Since Carmelo sold the property for P11,300,000.00 to Equatorial, the price at which Mayfair could have
purchased the property is, therefore, fixed. It can neither be more nor less. There is no dispute over it. The damages
which Mayfair suffered are in terms of actual injury and lost opportunities. The fairest solution would be to allow
Mayfair to exercise its right of first refusal at the price which it was entitled to accept or reject which is
P11,300,000.00. This is clear from the records.

To follow an alternative solution that Carmelo and Mayfair may resume negotiations for the sale to the latter of the
disputed property would be unjust and unkind to Mayfair because it is once more compelled to litigate to enforce its
right. It is not proper to give it an empty or vacuous victory in this case. From the viewpoint of Carmelo, it is like
asking a fish if it would accept the choice of being thrown back into the river. Why should Carmelo be rewarded for
and allowed to profit from, its wrongdoing? Prices of real estate have skyrocketed. After having sold the property for
P11,300,000.00, why should it be given another chance to sell it at an increased price?

Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was nothing to execute because a
contract over the right of first refusal belongs to a class of preparatory juridical relations governed not by the law on
contracts but by the codal provisions on human relations. This may apply here if the contract is limited to the buying
and selling of the real property. However, the obligation of Carmelo to first offer the property to Mayfair is embodied
in a contract. It is Paragraph 8 on the right of first refusal which created the obligation. It should be enforced
according to the law on contracts instead of the panoramic and indefinite rule on human relations. The latter remedy
encourages multiplicity of suits. There is something to execute and that is for Carmelo to comply with its obligation to
the property under the right of the first refusal according to the terms at which they should have been offered then to
Mayfair, at the price when that offer should have been made. Also, Mayfair has to accept the offer. This juridical
relation is not amorphous nor is it merely preparatory. Paragraphs 8 of the two leases can be executed according to
their terms.

On the question of interest payments on the principal amount of P11,300,000.00, it must be borne in mind that both
Carmelo and Equatorial acted in bad faith. Carmelo knowingly and deliberately broke a contract entered into with
Mayfair. It sold the property to Equatorial with purpose and intend to withhold any notice or knowledge of the sale
coming to the attention of Mayfair. All the circumstances point to a calculated and contrived plan of non-compliance
with the agreement of first refusal.

On the part of Equatorial, it cannot be a buyer in good faith because it bought the property with notice and full
knowledge that Mayfair had a right to or interest in the property superior to its own. Carmelo and Equatorial took
unconscientious advantage of Mayfair.

Neither may Carmelo and Equatorial avail of considerations based on equity which might warrant the grant of
interests. The vendor received as payment from the vendee what, at the time, was a full and fair price for the property.
It has used the P11,300,000.00 all these years earning income or interest from the amount. Equatorial, on the other
hand, has received rents and otherwise profited from the use of the property turned over to it by Carmelo. In fact,
during all the years that this controversy was being litigated, Mayfair paid rentals regularly to the buyer who had an
inferior right to purchase the property. Mayfair is under no obligation to pay any interests arising from this judgment
to either Carmelo or Equatorial.

WHEREFORE, the petition for review of the decision of the Court of Appeals, dated June 23, 1992, in CA-G.R. CV
No. 32918, is HEREBY DENIED. The Deed of Absolute Sale between petitioners Equatorial Realty Development,
Inc. and Carmelo & Bauermann, Inc. is hereby deemed rescinded; petitioner Carmelo & Bauermann is ordered to
return to petitioner Equatorial Realty Development the purchase price. The latter is directed to execute the deeds and
documents necessary to return ownership to Carmelo and Bauermann of the disputed lots. Carmelo & Bauermann is
ordered to allow Mayfair Theater, Inc. to buy the aforesaid lots for P11,300,000.00.

SO ORDERED.

Regalado, Davide, Jr., Bellosillo, Melo, Puno, Kapunan, Mendoza and Francisco, JJ., concur.

Narvasa, C.J., took no part.

50
 Republic of the Philippines

SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 111538 February 26, 1997

PARAÑAQUE KINGS ENTERPRISES, INCORPORATED, petitioner,

vs.

COURT OF APPEALS, CATALINA L. SANTOS, represented by her attorney-in-fact, LUZ B. PROTACIO,

and DAVID A. RAYMUNDO, respondents.

PANGANIBAN, J.:

Do allegations in a complaint showing violation of a contractual right of "first option or priority to buy the properties
subject of the lease" constitute a valid cause of action? Is the grantee of such right entitled to be offered the same
terms and conditions as those given to a third party who eventually bought such properties? In short, is such right of
first refusal enforceable by an action for specific performance?

These questions are answered in the affirmative by this Court in resolving this petition for review under Rule 45 of the
Rules of Court challenging the Decision 1 of the Court of Appeals 2 promulgated on March 29, 1993, in CA-G.R. CV
No. 34987 entitled "Parañaque Kings Enterprises, Inc. vs. Catalina L. Santos, et al.," which affirmed the order 3 of
September 2, 1991, of the Regional Trial Court of Makati, Branch 57, 4 dismissing Civil Case No. 91-786 for lack of a
valid cause of action.

Facts of the Case

5
On March 19, 1991, herein petitioner filed before the Regional Trial Court of Makati a complaint, which is
reproduced in full below:

Plaintiff, by counsel, respectfully states that:

1. Plaintiff is a private corporation organized and existing under and by virtue of the laws of the Philippines, with
principal place of business of (sic) Dr. A. Santos Avenue, Parañaque, Metro Manila, while defendant Catalina L.
Santos, is of legal age, widow, with residence and postal address at 444 Plato Street, Ct., Stockton, California, USA,
represented in this action by her attorney-in-fact, Luz B. Protacio, with residence and postal address at No, 12, San
Antonio Street, Magallanes Village, Makati, Metro Manila, by virtue of a general power of attorney. Defendant David
A. Raymundo, is of legal age, single, with residence and postal address at 1918 Kamias Street, Damariñas Village,
Makati, Metro Manila, where they (sic) may be served with summons and other court processes. Xerox copy of the
general power of attorney is hereto attached as Annex "A".

2. Defendant Catalina L. Santos is the owner of eight (8) parcels of land located at (sic) Parañaque, Metro Manila with
transfer certificate of title nos. S-19637, S-19638 and S-19643 to S-19648. Xerox copies of the said title ( sic) are
hereto attached as Annexes "B" to "I", respectively.

3. On November 28, 1977, a certain Frederick Chua leased the above-described property from defendant Catalina L.
Santos, the said lease was registered in the Register of Deeds. Xerox copy of the lease is hereto attached as Annex "J".

4. On February 12, 1979, Frederick Chua assigned all his rights and interest and participation in the leased property to
Lee Ching Bing, by virtue of a deed of assignment and with the conformity of defendant Santos, the said assignment
was also registered. Xerox copy of the deed of assignment is hereto attached as Annex "K".
51
5. On August 6, 1979, Lee Ching Bing also assigned all his rights and interest in the leased property to Parañaque
Kings Enterprises, Incorporated by virtue of a deed of assignment and with the conformity of defendant Santos, the
same was duly registered, Xerox copy of the deed of assignment is hereto attached as Annex "L".

6. Paragraph 9 of the assigned leased (sic) contract provides among others that:

"9. That in case the properties subject of the lease agreement are sold or encumbered, Lessors shall impose as a
condition that the buyer or mortgagee thereof shall recognize and be bound by all the terms and conditions of this
lease agreement and shall respect this Contract of Lease as if they are the LESSORS thereof and in case of sale,
LESSEE shall have the first option or priority to buy the properties subject of the lease;"

7. On September 21, 1988, defendant Santos sold the eight parcels of land subject of the lease to defendant David
Raymundo for a consideration of FIVE MILLION (P5,000,000.00) PESOS. The said sale was in contravention of the
contract of lease, for the first option or priority to buy was not offered by defendant Santos to the plaintiff. Xerox copy
of the deed of sale is hereto attached as Annex "M".

8. On March 5, 1989, defendant Santos wrote a letter to the plaintiff informing the same of the sale of the properties to
defendant Raymundo, the said letter was personally handed by the attorney-in-fact of defendant Santos, Xerox copy of
the letter is hereto attached as Annex "N".

9. Upon learning of this fact plaintiff's representative wrote a letter to defendant Santos, requesting her to rectify the
error and consequently realizing the error, she had it reconveyed to her for the same consideration of FIVE MILLION
(P5,000,000.00) PESOS. Xerox copies of the letter and the deed of reconveyance are hereto attached as Annexes "O"
and "P".

10. Subsequently the property was offered for sale to plaintiff by the defendant for the sum of FIFTEEN MILLION
(P15,000,000.00) PESOS. Plaintiff was given ten (10) days to make good of the offer, but therefore (sic) the said
period expired another letter came from the counsel of defendant Santos, containing the same tenor of (sic) the former
letter. Xerox copies of the letters are hereto attached as Annexes "Q" and "R".

11. On May 8, 1989, before the period given in the letter offering the properties for sale expired, plaintiff's counsel
wrote counsel of defendant Santos offering to buy the properties for FIVE MILLION (P5,000,000.00) PESOS. Xerox
copy of the letter is hereto attached as Annex "S".

12. On May 15, 1989, before they replied to the offer to purchase, another deed of sale was executed by defendant
Santos (in favor of) defendant Raymundo for a consideration of NINE MILLION (P9,000,000.00) PESOS. Xerox
copy of the second deed of sale is hereto attached as Annex "T".

13. Defendant Santos violated again paragraph 9 of the contract of lease by executing a second deed of sale to
defendant Raymundo.

14. It was only on May 17, 1989, that defendant Santos replied to the letter of the plaintiff's offer to buy or two days
after she sold her properties. In her reply she stated among others that the period has lapsed and the plaintiff is not a
privy (sic) to the contract. Xerox copy of the letter is hereto attached as Annex "U".

15. On June 28, 1989, counsel for plaintiff informed counsel of defendant Santos of the fact that plaintiff is the
assignee of all rights and interest of the former lessor. Xerox copy of the letter is hereto attached as Annex "V".

16. On July 6, 1989, counsel for defendant Santos informed the plaintiff that the new owner is defendant Raymundo.
Xerox copy of the letter is hereto attached as Annex "W".

17. From the preceding facts it is clear that the sale was simulated and that there was a collusion between the
defendants in the sales of the leased properties, on the ground that when plaintiff wrote a letter to defendant Santos to
rectify the error, she immediately have (sic) the property reconveyed it (sic) to her in a matter of twelve (12) days.

18. Defendants have the same counsel who represented both of them in their exchange of communication with
plaintiff's counsel, a fact that led to the conclusion that a collusion exist (sic) between the defendants.

19. When the property was still registered in the name of defendant Santos, her collector of the rental of the leased
properties was her brother-in-law David Santos and when it was transferred to defendant Raymundo the collector was

52
still David Santos up to the month of June, 1990. Xerox copies of cash vouchers are hereto attached as Annexes "X" to
"HH", respectively.

20. The purpose of this unholy alliance between defendants Santos and Raymundo is to mislead the plaintiff and make
it appear that the price of the leased property is much higher than its actual value of FIVE MILLION (P5,000,000.00)
PESOS, so that plaintiff would purchase the properties at a higher price.

21. Plaintiff has made considerable investments in the said leased property by erecting a two (2) storey, six (6) doors
commercial building amounting to THREE MILLION (P3,000,000.00) PESOS. This considerable improvement was
made on the belief that eventually the said premises shall be sold to the plaintiff.

22. As a consequence of this unlawful act of the defendants, plaintiff will incurr (sic) total loss of THREE MILLION
(P3,000,000.00) PESOS as the actual cost of the building and as such defendants should be charged of the same
amount for actual damages.

23. As a consequence of the collusion, evil design and illegal acts of the defendants, plaintiff in the process suffered
mental anguish, sleepless nights, bismirched (sic) reputation which entitles plaintiff to moral damages in the amount
of FIVE MILLION (P5,000,000.00) PESOS.

24. The defendants acted in a wanton, fraudulent, reckless, oppressive or malevolent manner and as a deterrent to the
commission of similar acts, they should be made to answer for exemplary damages, the amount left to the discretion
of the Court.

25. Plaintiff demanded from the defendants to rectify their unlawful acts that they committed, but defendants refused
and failed to comply with plaintiffs just and valid and (sic) demands. Xerox copies of the demand letters are hereto
attached as Annexes "KK" to "LL", respectively.

26. Despite repeated demands, defendants failed and refused without justifiable cause to satisfy plaintiff's claim, and
was constrained to engaged (sic) the services of undersigned counsel to institute this action at a contract fee of
P200,000.00, as and for attorney's fees, exclusive of cost and expenses of litigation.

PRAYER

WHEREFORE, it is respectfully prayed, that judgment be rendered in favor of the plaintiff and against defendants and
ordering that:

a. The Deed of Sale between defendants dated May 15, 1989, be annulled and the leased properties be sold to the
plaintiff in the amount of P5,000,000.00;

b. Dependants (sic) pay plaintiff the sum of P3,000,000.00 as actual damages;

c. Defendants pay the sum of P5,000,000.00 as moral damages;

d. Defendants pay exemplary damages left to the discretion of the Court;

e. Defendants pay the sum of not less than P200,000.00 as attorney's fees.

Plaintiff further prays for other just and equitable reliefs plus cost of suit.

Instead of filing their respective answers, respondents filed motions to dismiss anchored on the grounds of lack of
cause of action, estoppel and laches.

On September 2, 1991, the trial court issued the order dismissing the complaint for lack of a valid cause of action. It
ratiocinated thus:

Upon the very face of the plaintiff's Complaint itself, it therefore indubitably appears that the defendant Santos had
verily complied with paragraph 9 of the Lease Agreement by twice offering the properties for sale to the plaintiff for
~1 5 M. The said offers, however, were plainly rejected by the plaintiff which scorned the said offer as
"RIDICULOUS". There was therefore a definite refusal on the part of the plaintiff to accept the offer of defendant
Santos. For in acquiring the said properties back to her name, and in so making the offers to sell both by herself

53
(attorney-in-fact) and through her counsel, defendant Santos was indeed conscientiously complying with her
obligation under paragraph 9 of the Lease Agreement. . . . .

xxx xxx xxx

This is indeed one instance where a Complaint, after barely commencing to create a cause of action, neutralized itself
by its subsequent averments which erased or extinguished its earlier allegations of an impending wrong.
Consequently, absent any actionable wrong in the very face of the Complaint itself, the plaintiffs subsequent
protestations of collusion is bereft or devoid of any meaning or purpose. . . . .

The inescapable result of the foregoing considerations point to no other conclusion than that the Complaint actually
does not contain any valid cause of action and should therefore be as it is hereby ordered DISMISSED. The Court
finds no further need to consider the other grounds of estoppel and laches inasmuch as this resolution is sufficient to
dispose the matter. 6

Petitioners appealed to the Court of Appeals which affirmed in toto the ruling of the trial court, and further reasoned
that:

. . . . Appellant's protestations that the P15 million price quoted by appellee Santos was reduced to P9 million when
she later resold the leased properties to Raymundo has no valid legal moorings because appellant, as a prospective
buyer, cannot dictate its own price and forcibly ram it against appellee Santos, as owner, to buy off her leased
properties considering the total absence of any stipulation or agreement as to the price or as to how the price should be
computed under paragraph 9 of the lease contract, . . . . 7
8
Petitioner moved for reconsideration but was denied in an order dated August 20, 1993.

Hence this petition. Subsequently, petitioner filed an "Urgent Motion for the Issuance of Restraining Order and/or
Writ of Preliminary Injunction and to Hold Respondent David A. Raymundo in Contempt of Court." 9 The motion
sought to enjoin respondent Raymundo and his counsel from pursuing the ejectment complaint filed before the
barangay captain of San Isidro, Parañaque, Metro Manila; to direct the dismissal of said ejectment complaint or of any
similar action that may have been filed; and to require respondent Raymundo to explain why he should not be held in
contempt of court for forum-shopping. The ejectment suit initiated by respondent Raymundo against petitioner arose
from the expiration of the lease contract covering the property subject of this case. The ejectment suit was decided in
favor of Raymundo, and the entry of final judgment in respect thereof renders the said motion moot and academic.

Issue

The principal legal issue presented before us for resolution is whether the aforequoted complaint alleging breach of
the contractual right of "first option or priority to buy" states a valid cause of action.

Petitioner contends that the trial court as well as the appellate tribunal erred in dismissing the complaint because it in
fact had not just one but at least three (3) valid causes of action, to wit: (1) breach of contract, (2) its right of first
refusal founded in law, and (3) damages.

Respondents Santos and Raymundo, in their separate comments, aver that the petition should be denied for not raising
a question of law as the issue involved is purely factual — whether respondent Santos complied with paragraph 9 of
the lease agreement — and for not having complied with Section 2, Rule 45 of the Rules of Court, requiring the filing
of twelve (12) copies of the petitioner's brief. Both maintain that the complaint filed by petitioner before the Regional
Trial Court of Makati stated no valid cause of action and that petitioner failed to substantiate its claim that the lower
courts decided the same "in a way not in accord with law and applicable decisions of the Supreme Court"; or that the
Court of Appeals has "sanctioned departure by a trial court from the accepted and usual course of judicial
proceedings" so as to merit the exercise by this Court of the power of review under Rule 45 of the Rules of Court.
Furthermore, they reiterate estoppel and laches as grounds for dismissal, claiming that petitioner's payment of rentals
of the leased property to respondent Raymundo from June 15, 1989, to June 30, 1990, was an acknowledgment of the
latter's status as new owner-lessor of said property, by virtue of which petitioner is deemed to have waived or
abandoned its first option to purchase.

Private respondents likewise contend that the deed of assignment of the lease agreement did not include the
assignment of the option to purchase. Respondent Raymundo further avers that he was not privy to the contract of
lease, being neither the lessor nor lessee adverted to therein, hence he could not be held liable for violation thereof.
54
 The Court's Ruling

Preliminary Issue: Failure to File

Sufficient Copies of Brief

We first dispose of the procedural issue raised by respondents, particularly petitioner's failure to file twelve (12)
copies of its brief. We have ruled that when non-compliance with the Rules was not intended for delay or did not
result in prejudice to the adverse party, dismissal of appeal on mere technicalities — in cases where appeal is a matter
of right — may be stayed, in the exercise of the court's equity jurisdiction. 10 It does not appear that respondents were
unduly prejudiced by petitioner's nonfeasance. Neither has it been shown that such failure was intentional.

Main Issue: Validity of Cause of Action

We do not agree with respondents' contention that the issue involved is purely factual. The principal legal question, as
stated earlier, is whether the complaint filed by herein petitioner in the lower court states a valid cause of action. Since
such question assumes the facts alleged in the complaint as true, it follows that the determination thereof is one of law,
and not of facts. There is a question of law in a given case when the doubt or difference arises as to what the law is on
a certain state of facts, and there is a question of fact when the doubt or difference arises as to the truth or the
falsehood of alleged facts. 11

At the outset, petitioner concedes that when the ground for a motion to dismiss is lack of cause of action, such ground
must appear on the face of the complaint; that to determine the sufficiency of a cause of action, only the facts alleged
in the complaint and no others should be considered; and that the test of sufficiency of the facts alleged in a petition or
complaint to constitute a cause of action is whether, admitting the facts alleged, the court could render a valid
judgment upon the same in accordance with the prayer of the petition or complaint.

A cause of action exists if the following elements are present: (1) a right in favor of the plaintiff by whatever means
and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to respect or not to
violate such right, and (3) an act or omission on the part of such defendant violative of the right of plaintiff or
constituting a breach of the obligation of defendant to the plaintiff for which the latter may maintain an action for
recovery of damages. 12

In determining whether allegations of a complaint are sufficient to support a cause of action, it must be borne in mind
that the complaint does not have to establish or allege facts proving the existence of a cause of action at the outset; this
will have to be done at the trial on the merits of the case. To sustain a motion to dismiss for lack of cause of action, the
complaint must show that the claim for relief does not exist, rather than that a claim has been defectively stated, or is
ambiguous, indefinite or uncertain. 13

Equally important, a defendant moving to dismiss a complaint on the ground of lack of cause of action is regarded as
having hypothetically admitted all the averments thereof. 14

A careful examination of the complaint reveals that it sufficiently alleges an actionable contractual breach on the part
of private respondents. Under paragraph 9 of the contract of lease between respondent Santos and petitioner, the latter
was granted the "first option or priority" to purchase the leased properties in case Santos decided to sell. If Santos
never decided to sell at all, there can never be a breach, much less an enforcement of such "right." But on September
21, 1988, Santos sold said properties to Respondent Raymundo without first offering these to petitioner. Santos indeed
realized her error, since she repurchased the properties after petitioner complained. Thereafter, she offered to sell the
properties to petitioner for P15 million, which petitioner, however, rejected because of the "ridiculous" price. But
Santos again appeared to have violated the same provision of the lease contract when she finally resold the properties
to respondent Raymundo for only P9 million without first offering them to petitioner at such price. Whether there was
actual breach which entitled petitioner to damages and/or other just or equitable relief, is a question which can better
be resolved after trial on the merits where each party can present evidence to prove their respective allegations and
defenses. 15

The trial and appellate courts based their decision to sustain respondents' motion to dismiss on the allegations of
Parañaque Kings Enterprises that Santos had actually offered the subject properties for sale to it prior to the final sale
in favor of Raymundo, but that the offer was rejected. According to said courts, with such offer, Santos had verily
complied with her obligation to grant the right of first refusal to petitioner.

55
We hold, however, that in order to have full compliance with the contractual right granting petitioner the first option
to purchase, the sale of the properties for the amount of P9 million, the price for which they were finally sold to
respondent Raymundo, should have likewise been first offered to petitioner.

The Court has made an extensive and lengthy discourse on the concept of, and obligations under, a right of first
refusal in the case of Guzman, Bocaling & Co. vs. Bonnevie. 16 In that case, under a contract of lease, the lessees (Raul
and Christopher Bonnevie) were given a "right of first priority" to purchase the leased property in case the lessor
(Reynoso) decided to sell. The selling price quoted to the Bonnevies was 600,000.00 to be fully paid in cash, less a
mortgage lien of P100,000.00. On the other hand, the selling price offered by Reynoso to and accepted by Guzman
was only P400,000.00 of which P137,500.00 was to be paid in cash while the balance was to be paid only when the
property was cleared of occupants. We held that even if the Bonnevies could not buy it at the price quoted
(P600,000.00), nonetheless, Reynoso could not sell it to another for a lower price and under more favorable terms and
conditions without first offering said favorable terms and price to the Bonnevies as well. Only if the Bonnevies failed
to exercise their right of first priority could Reynoso thereafter lawfully sell the subject property to others, and only
under the same terms and conditions previously offered to the Bonnevies.

Of course, under their contract, they specifically stipulated that the Bonnevies could exercise the right of first priority,
"all things and conditions being equal." This Court interpreted this proviso to mean that there should be identity of
terms and conditions to be offered to the Bonnevies and all other prospective buyers, with the Bonnevies to enjoy the
right of first priority. We hold that the same rule applies even without the same proviso if the right of first refusal (or
the first option to buy) is not to be rendered illusory.

From the foregoing, the basis of the right of first refusal* must be the current offer to sell of the seller or offer to
purchase of any prospective buyer. Only after the optionee fails to exercise its right of first priority under the same
terms and within the period contemplated, could the owner validly offer to sell the property to a third person, again,
under the same terms as offered to the optionee.

This principle was reiterated in the very recent case of Equatorial Realty vs. Mayfair Theater, Inc. 17 which was
decided en banc. This Court upheld the right of first refusal of the lessee Mayfair, and rescinded the sale of the
property by the lessor Carmelo to Equatorial Realty "considering that Mayfair, which had substantial interest over the
subject property, was prejudiced by its sale to Equatorial without Carmelo conferring to Mayfair every opportunity to
negotiate within the 30-day stipulated period" (emphasis supplied).

In that case, two contracts of lease between Carmelo and Mayfair provided "that if the LESSOR should desire to sell
the leased premises, the LESSEE shall be given 30 days exclusive option to purchase the same." Carmelo initially
offered to sell the leased property to Mayfair for six to seven million pesos. Mayfair indicated interest in purchasing
the property though it invoked the 30-day period. Nothing was heard thereafter from Carmelo. Four years later, the
latter sold its entire Recto Avenue property, including the leased premises, to Equatorial for P11,300,000.00 without
priorly informing Mayfair. The Court held that both Carmelo and Equatorial acted in bad faith: Carmelo for
knowingly violating the right of first option of Mayfair, and Equatorial for purchasing the property despite being
aware of the contract stipulation. In addition to rescission of the contract of sale, the Court ordered Carmelo to allow
Mayfair to buy the subject property at the same price of P11,300,000.00.

No cause of action

under P.D. 1517

Petitioner also invokes Presidential Decree No. 1517, or the Urban Land Reform Law, as another source of its right of
first refusal. It claims to be covered under said law, being the "rightful occupant of the land and its structures" since it
is the lawful lessee thereof by reason of contract. Under the lease contract, petitioner would have occupied the
property for fourteen (14) years at the end of the contractual period.

Without probing into whether petitioner is rightfully a beneficiary under said law, suffice it to say that this Court has
previously ruled that under

Section 6 18 of P.D. 1517, "the terms and conditions of the sale in the exercise of the lessee's right of first refusal to
purchase shall be determined by the Urban Zone Expropriation and Land Management Committee. Hence, . . . .
certain prerequisites must be complied with by anyone who wishes to avail himself of the benefits of the decree." 19
There being no allegation in its complaint that the prerequisites were complied with, it is clear that the complaint did
fail to state a cause of action on this ground.
56
Deed of Assignment included

the option to purchase

Neither do we find merit in the contention of respondent Santos that the assignment of the lease contract to petitioner
did not include the option to purchase. The provisions of the deeds of assignment with regard to matters assigned were
very clear. Under the first assignment between Frederick Chua as assignor and Lee Ching Bing as assignee, it was
expressly stated that:

. . . . the ASSIGNOR hereby CEDES, TRANSFERS and ASSIGNS to herein ASSIGNEE, all his rights, interest and
participation over said premises afore-described, . . . . 20 (emphasis supplied)

And under the subsequent assignment executed between Lee Ching Bing as assignor and the petitioner, represented by
its Vice President Vicenta Lo Chiong, as assignee, it was likewise expressly stipulated that;

. . . . the ASSIGNOR hereby sells, transfers and assigns all his rights, interest and participation over said leased
premises, . . . . 21 (emphasis supplied)

One of such rights included in the contract of lease and, therefore, in the assignments of rights was the lessee's right of
first option or priority to buy the properties subject of the lease, as provided in paragraph 9 of the assigned lease
contract. The deed of assignment need not be very specific as to which rights and obligations were passed on to the
assignee. It is understood in the general provision aforequoted that all specific rights and obligations contained in the
contract of lease are those referred to as being assigned. Needless to state, respondent Santos gave her unqualified
conformity to both assignments of rights.

Respondent Raymundo privy

to the Contract of Lease

With respect to the contention of respondent Raymundo that he is not privy to the lease contract, not being the lessor
nor the lessee referred to therein, he could thus not have violated its provisions, but he is nevertheless a proper party.
Clearly, he stepped into the shoes of the owner-lessor of the land as, by virtue of his purchase, he assumed all the
obligations of the lessor under the lease contract. Moreover, he received benefits in the form of rental payments.
Furthermore, the complaint, as well as the petition, prayed for the annulment of the sale of the properties to him. Both
pleadings also alleged collusion between him and respondent Santos which defeated the exercise by petitioner of its
right of first refusal.

In order then to accord complete relief to petitioner, respondent Raymundo was a necessary, if not indispensable, party
to the case. 22 A favorable judgment for the petitioner will necessarily affect the rights of respondent Raymundo as the
buyer of the property over which petitioner would like to assert its right of first option to buy.

Having come to the conclusion that the complaint states a valid cause of action for breach of the right of first refusal
and that the trial court should thus not have dismissed the complaint, we find no more need to pass upon the question
of whether the complaint states a cause of action for damages or whether the complaint is barred by estoppel or laches.
As these matters require presentation and/or determination of facts, they can be best resolved after trial on the merits.

While the lower courts erred in dismissing the complaint, private respondents, however, cannot be denied their day in
court. While, in the resolution of a motion to dismiss, the truth of the facts alleged in the complaint are theoretically
admitted, such admission is merely hypothetical and only for the purpose of resolving the motion. In case of denial,
the movant is not to be deprived of the right to submit its own case and to submit evidence to rebut the allegations in
the complaint. Neither will the grant of the motion by a trial court and the ultimate reversal thereof by an appellate
court have the effect of stifling such right. 23 So too, the trial court should be given the opportunity to evaluate the
evidence, apply the law and decree the proper remedy. Hence, we remand the instant case to the trial court to allow
private respondents to have their day in court.

WHEREFORE, the petition is GRANTED. The assailed decisions of the trial court and Court of Appeals are hereby
REVERSED and SET ASIDE. The case is REMANDED to the Regional Trial Court of Makati for further
proceedings.

SO ORDERED.
57
Narvasa, C.J., Davide, Jr., Melo and Francisco, JJ., concur.

58
 Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. 109125 December 2, 1994

ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners,

vs.

THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT CORPORATION, respondents.

Antonio M. Albano for petitioners.

Umali, Soriano & Associates for private respondent.

VITUG, J.:

Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04 December 1991, in CA-G.R. SP
No. 26345 setting aside and declaring without force and effect the orders of execution of the trial court, dated 30
August 1991 and 27 September 1991, in Civil Case No. 87-41058.

The antecedents are recited in good detail by the appellate court thusly:

On July 29, 1987 a Second Amended Complaint for Specific Performance was filed by Ang Yu Asuncion and Keh
Tiong, et al., against Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan before the Regional Trial Court, Branch 31,
Manila in Civil Case No. 87-41058, alleging, among others, that plaintiffs are tenants or lessees of residential and
commercial spaces owned by defendants described as Nos. 630-638 Ongpin Street, Binondo, Manila; that they have
occupied said spaces since 1935 and have been religiously paying the rental and complying with all the conditions of
the lease contract; that on several occasions before October 9, 1986, defendants informed plaintiffs that they are
offering to sell the premises and are giving them priority to acquire the same; that during the negotiations, Bobby Cu
Unjieng offered a price of P6-million while plaintiffs made a counter offer of P5-million; that plaintiffs thereafter
asked the defendants to put their offer in writing to which request defendants acceded; that in reply to defendant's
letter, plaintiffs wrote them on October 24, 1986 asking that they specify the terms and conditions of the offer to sell;
that when plaintiffs did not receive any reply, they sent another letter dated January 28, 1987 with the same request;
that since defendants failed to specify the terms and conditions of the offer to sell and because of information received
that defendants were about to sell the property, plaintiffs were compelled to file the complaint to compel defendants to
sell the property to them.

Defendants filed their answer denying the material allegations of the complaint and interposing a special defense of
lack of cause of action.

After the issues were joined, defendants filed a motion for summary judgment which was granted by the lower court.
The trial court found that defendants' offer to sell was never accepted by the plaintiffs for the reason that the parties
did not agree upon the terms and conditions of the proposed sale, hence, there was no contract of sale at all.
Nonetheless, the lower court ruled that should the defendants subsequently offer their property for sale at a price of
P11-million or below, plaintiffs will have the right of first refusal. Thus the dispositive portion of the decision states:

WHEREFORE, judgment is hereby rendered in favor of the defendants and against the plaintiffs summarily
dismissing the complaint subject to the aforementioned condition that if the defendants subsequently decide to offer
their property for sale for a purchase price of Eleven Million Pesos or lower, then the plaintiffs has the option to

59
purchase the property or of first refusal, otherwise, defendants need not offer the property to the plaintiffs if the
purchase price is higher than Eleven Million Pesos.

SO ORDERED.

Aggrieved by the decision, plaintiffs appealed to this Court in

CA-G.R. CV No. 21123. In a decision promulgated on September 21, 1990 (penned by Justice Segundino G. Chua
and concurred in by Justices Vicente V. Mendoza and Fernando A. Santiago), this Court affirmed with modification
the lower court's judgment, holding:

In resume, there was no meeting of the minds between the parties concerning the sale of the property. Absent such
requirement, the claim for specific performance will not lie. Appellants' demand for actual, moral and exemplary
damages will likewise fail as there exists no justifiable ground for its award. Summary judgment for defendants was
properly granted. Courts may render summary judgment when there is no genuine issue as to any material fact and the
moving party is entitled to a judgment as a matter of law (Garcia vs. Court of Appeals, 176 SCRA 815). All requisites
obtaining, the decision of the court a quo is legally justifiable.

WHEREFORE, finding the appeal unmeritorious, the judgment appealed from is hereby AFFIRMED, but subject to
the following modification: The court a quo in the aforestated decision gave the plaintiffs-appellants the right of first
refusal only if the property is sold for a purchase price of Eleven Million pesos or lower; however, considering the
mercurial and uncertain forces in our market economy today. We find no reason not to grant the same right of first
refusal to herein appellants in the event that the subject property is sold for a price in excess of Eleven Million pesos.
No pronouncement as to costs.

SO ORDERED.

The decision of this Court was brought to the Supreme Court by petition for review on certiorari. The Supreme Court
denied the appeal on May 6, 1991 "for insufficiency in form and substances" (Annex H, Petition).

On November 15, 1990, while CA-G.R. CV No. 21123 was pending consideration by this Court, the Cu Unjieng
spouses executed a Deed of Sale (Annex D, Petition) transferring the property in question to herein petitioner Buen
Realty and Development Corporation, subject to the following terms and conditions:

1. That for and in consideration of the sum of FIFTEEN MILLION PESOS (P15,000,000.00), receipt of which in full
is hereby acknowledged, the VENDORS hereby sells, transfers and conveys for and in favor of the VENDEE, his
heirs, executors, administrators or assigns, the above-described property with all the improvements found therein
including all the rights and interest in the said property free from all liens and encumbrances of whatever nature,
except the pending ejectment proceeding;

2. That the VENDEE shall pay the Documentary Stamp Tax, registration fees for the transfer of title in his favor and
other expenses incidental to the sale of above-described property including capital gains tax and accrued real estate
taxes.

As a consequence of the sale, TCT No. 105254/T-881 in the name of the Cu Unjieng spouses was cancelled and, in
lieu thereof, TCT No. 195816 was issued in the name of petitioner on December 3, 1990.

On July 1, 1991, petitioner as the new owner of the subject property wrote a letter to the lessees demanding that the
latter vacate the premises.

On July 16, 1991, the lessees wrote a reply to petitioner stating that petitioner brought the property subject to the
notice of lis pendens regarding Civil Case No. 87-41058 annotated on TCT No. 105254/T-881 in the name of the Cu
Unjiengs.

The lessees filed a Motion for Execution dated August 27, 1991 of the Decision in Civil Case No. 87-41058 as
modified by the Court of Appeals in CA-G.R. CV No. 21123.

On August 30, 1991, respondent Judge issued an order (Annex A, Petition) quoted as follows:

60
Presented before the Court is a Motion for Execution filed by plaintiff represented by Atty. Antonio Albano. Both
defendants Bobby Cu Unjieng and Rose Cu Unjieng represented by Atty. Vicente Sison and Atty. Anacleto Magno
respectively were duly notified in today's consideration of the motion as evidenced by the rubber stamp and signatures
upon the copy of the Motion for Execution.

The gist of the motion is that the Decision of the Court dated September 21, 1990 as modified by the Court of Appeals
in its decision in CA G.R. CV-21123, and elevated to the Supreme Court upon the petition for review and that the
same was denied by the highest tribunal in its resolution dated May 6, 1991 in G.R. No.

L-97276, had now become final and executory. As a consequence, there was an Entry of Judgment by the Supreme
Court as of June 6, 1991, stating that the aforesaid modified decision had already become final and executory.

It is the observation of the Court that this property in dispute was the subject of the Notice of Lis Pendens and that the
modified decision of this Court promulgated by the Court of Appeals which had become final to the effect that should
the defendants decide to offer the property for sale for a price of P11 Million or lower, and considering the mercurial
and uncertain forces in our market economy today, the same right of first refusal to herein plaintiffs/appellants in the
event that the subject property is sold for a price in excess of Eleven Million pesos or more.

WHEREFORE, defendants are hereby ordered to execute the necessary Deed of Sale of the property in litigation in
favor of plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go for the consideration of P15 Million pesos in
recognition of plaintiffs' right of first refusal and that a new Transfer Certificate of Title be issued in favor of the
buyer.

All previous transactions involving the same property notwithstanding the issuance of another title to Buen Realty
Corporation, is hereby set aside as having been executed in bad faith.

SO ORDERED.

On September 22, 1991 respondent Judge issued another order, the dispositive portion of which reads:

WHEREFORE, let there be Writ of Execution issue in the above-entitled case directing the Deputy Sheriff Ramon
Enriquez of this Court to implement said Writ of Execution ordering the defendants among others to comply with the
aforesaid Order of this Court within a period of one (1) week from receipt of this Order and for defendants to execute
the necessary Deed of Sale of the property in litigation in favor of the plaintiffs Ang Yu Asuncion, Keh Tiong and
Arthur Go for the consideration of P15,000,000.00 and ordering the Register of Deeds of the City of Manila, to cancel
and set aside the title already issued in favor of Buen Realty Corporation which was previously executed between the
latter and defendants and to register the new title in favor of the aforesaid plaintiffs Ang Yu Asuncion, Keh Tiong and
Arthur Go.

SO ORDERED.

On the same day, September 27, 1991 the corresponding writ of execution (Annex C, Petition) was issued. 1

On 04 December 1991, the appellate court, on appeal to it by private respondent, set aside and declared without force
and effect the above questioned orders of the court a quo.

In this petition for review on certiorari, petitioners contend that Buen Realty can be held bound by the writ of
execution by virtue of the notice of lis pendens, carried over on TCT No. 195816 issued in the name of Buen Realty,
at the time of the latter's purchase of the property on 15 November 1991 from the Cu Unjiengs.

We affirm the decision of the appellate court.

A not too recent development in real estate transactions is the adoption of such arrangements as the right of first
refusal, a purchase option and a contract to sell. For ready reference, we might point out some fundamental precepts
that may find some relevance to this discussion.

An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation is constituted
upon the concurrence of the essential elements thereof, viz: (a) The vinculum juris or juridical tie which is the efficient
cause established by the various sources of obligations (law, contracts, quasi-contracts, delicts and quasi-delicts) ; (b)
the object which is the prestation or conduct; required to be observed (to give, to do or not to do); and (c) the subject-

61
persons who, viewed from the demandability of the obligation, are the active (obligee) and the passive (obligor)
subjects.

Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a meeting of minds between two
persons whereby one binds himself, with respect to the other, to give something or to render some service (Art. 1305,
Civil Code). A contract undergoes various stages that include its negotiation or preparation, its perfection and, finally,
its consummation. Negotiation covers the period from the time the prospective contracting parties indicate interest in
the contract to the time the contract is concluded (perfected). The perfection of the contract takes place upon the
concurrence of the essential elements thereof. A contract which is consensual as to perfection is so established upon a
mere meeting of minds, i.e., the concurrence of offer and acceptance, on the object and on the cause thereof. A
contract which requires, in addition to the above, the delivery of the object of the agreement, as in a pledge or
commodatum, is commonly referred to as a real contract. In a solemn contract, compliance with certain formalities
prescribed by law, such as in a donation of real property, is essential in order to make the act valid, the prescribed
form being thereby an essential element thereof. The stage of consummation begins when the parties perform their
respective undertakings under the contract culminating in the extinguishment thereof.

Until the contract is perfected, it cannot, as an independent source of obligation, serve as a binding juridical relation.
In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is perfected when
a person, called the seller, obligates himself, for a price certain, to deliver and to transfer ownership of a thing or right
to another, called the buyer, over which the latter agrees. Article 1458 of the Civil Code provides:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to
deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.

A contract of sale may be absolute or conditional.

When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the ownership of the
thing sold is retained until the fulfillment of a positive suspensive condition (normally, the full payment of the
purchase price), the breach of the condition will prevent the obligation to convey title from acquiring an obligatory
force.2 In Dignos vs. Court of Appeals (158 SCRA 375), we have said that, although denominated a "Deed of
Conditional Sale," a sale is still absolute where the contract is devoid of any proviso that title is reserved or the right to
unilaterally rescind is stipulated, e.g., until or unless the price is paid. Ownership will then be transferred to the buyer
upon actual or constructive delivery (e.g., by the execution of a public document) of the property sold. Where the
condition is imposed upon the perfection of the contract itself, the failure of the condition would prevent such
perfection.3 If the condition is imposed on the obligation of a party which is not fulfilled, the other party may either
waive the condition or refuse to proceed with the sale (Art. 1545, Civil Code). 4

An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is fixed, can
be obligatory on the parties, and compliance therewith may accordingly be exacted. 5

An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a
valuable consideration distinct and separate from the price, is what may properly be termed a perfected contract of
option. This contract is legally binding, and in sales, it conforms with the second paragraph of Article 1479 of the
Civil Code, viz:

Art. 1479. . . .

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if
the promise is supported by a consideration distinct from the price. (1451a) 6

Observe, however, that the option is not the contract of sale itself.7 The optionee has the right, but not the obligation,
to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the option, a bilateral promise
to sell and to buy ensues and both parties are then reciprocally bound to comply with their respective undertakings. 8

Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely
an offer. Public advertisements or solicitations and the like are ordinarily construed as mere invitations to make offers
or only as proposals. These relations, until a contract is perfected, are not considered binding commitments. Thus, at
any time prior to the perfection of the contract, either negotiating party may stop the negotiation . The offer, at this
stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and

62
not necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given to
the offeree within which to accept the offer, the following rules generally govern:

(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to
withdraw the offer before its acceptance, or, if an acceptance has been made, before the offeror's coming to know of
such fact, by communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co.
vs. Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell under Art. 1479, modifying
the previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural
Bank of Parañaque, Inc., vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw,
however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under
Article 19 of the Civil Code which ordains that "every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe honesty and good faith."

(2) If the period has a separate consideration, a contract of "option" is deemed perfected, and it would be a breach of
that contract to withdraw the offer during the agreed period. The option, however, is an independent contract by itself,
and it is to be distinguished from the projected main agreement (subject matter of the option) which is obviously yet to
be concluded. If, in fact, the optioner-offeror withdraws the offer before its acceptance (exercise of the option) by the
optionee-offeree, the latter may not sue for specific performance on the proposed contract ("object" of the option)
since it has failed to reach its own stage of perfection. The optioner-offeror, however, renders himself liable for
damages for breach of the option. In these cases, care should be taken of the real nature of the consideration given, for
if, in fact, it has been intended to be part of the consideration for the main contract with a right of withdrawal on the
part of the optionee, the main contract could be deemed perfected; a similar instance would be an "earnest money" in a
contract of sale that can evidence its perfection (Art. 1482, Civil Code).

In the law on sales, the so-called "right of first refusal" is an innovative juridical relation. Needless to point out, it
cannot be deemed a perfected contract of sale under Article 1458 of the Civil Code. Neither can the right of first
refusal, understood in its normal concept, per se be brought within the purview of an option under the second
paragraph of Article 1479, aforequoted, or possibly of an offer under Article 1319 9 of the same Code. An option or an
offer would require, among other things, 10 a clear certainty on both the object and the cause or consideration of the
envisioned contract. In a right of first refusal, while the object might be made determinate, the exercise of the right,
however, would be dependent not only on the grantor's eventual intention to enter into a binding juridical relation with
another but also on terms, including the price, that obviously are yet to be later firmed up. Prior thereto, it can at best
be so described as merely belonging to a class of preparatory juridical relations governed not by contracts (since the
essential elements to establish the vinculum juris would still be indefinite and inconclusive) but by, among other laws
of general application, the pertinent scattered provisions of the Civil Code on human conduct.

Even on the premise that such right of first refusal has been decreed under a final judgment, like here, its breach
cannot justify correspondingly an issuance of a writ of execution under a judgment that merely recognizes its
existence, nor would it sanction an action for specific performance without thereby negating the indispensable element
of consensuality in the perfection of contracts. 11 It is not to say, however, that the right of first refusal would be
inconsequential for, such as already intimated above, an unjustified disregard thereof, given, for instance, the
circumstances expressed in Article 1912 of the Civil Code, can warrant a recovery for damages.

The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded a "right of first refusal" in
favor of petitioners. The consequence of such a declaration entails no more than what has heretofore been said. In fine,
if, as it is here so conveyed to us, petitioners are aggrieved by the failure of private respondents to honor the right of
first refusal, the remedy is not a writ of execution on the judgment, since there is none to execute, but an action for
damages in a proper forum for the purpose.

Furthermore, whether private respondent Buen Realty Development Corporation, the alleged purchaser of the
property, has acted in good faith or bad faith and whether or not it should, in any case, be considered bound to respect
the registration of the lis pendens in Civil Case No. 87-41058 are matters that must be independently addressed in
appropriate proceedings. Buen Realty, not having been impleaded in Civil Case No. 87-41058, cannot be held subject
to the writ of execution issued by respondent Judge, let alone ousted from the ownership and possession of the
property, without first being duly afforded its day in court.

We are also unable to agree with petitioners that the Court of Appeals has erred in holding that the writ of execution
varies the terms of the judgment in Civil Case No. 87-41058, later affirmed in CA-G.R. CV-21123. The Court of
Appeals, in this regard, has observed:

63
Finally, the questioned writ of execution is in variance with the decision of the trial court as modified by this Court.
As already stated, there was nothing in said decision 13 that decreed the execution of a deed of sale between the Cu
Unjiengs and respondent lessees, or the fixing of the price of the sale, or the cancellation of title in the name of
petitioner (Limpin vs. IAC, 147 SCRA 516; Pamantasan ng Lungsod ng Maynila vs. IAC, 143 SCRA 311; De
Guzman vs. CA, 137 SCRA 730; Pastor vs. CA, 122 SCRA 885).

It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not have decreed at the time the
execution of any deed of sale between the Cu Unjiengs and petitioners.

WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the questioned Orders, dated 30 August
1991 and 27 September 1991, of the court a quo. Costs against petitioners.

SO ORDERED.

Narvasa, C.J., Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno and Mendoza, JJ.,
concur.

Kapunan, J., took no part.

Feliciano, J., is on leave.

64
65
 THIRD DIVISION

G.R. No. 140479 March 8, 2001

ROSENCOR DEVELOPMENT CORPORATION and RENE JOAQUIN, petitioners,

vs.

PATERNO INQUING, IRENE GUILLERMO, FEDERICO BANTUGAN, FERNANDO MAGBANUA and

LIZZA TIANGCO, respondents.

GONZAGA-REYES, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking reversal of the Decision 1 of the
Court of Appeals dated June 25, 1999 in CA-G.R. CV No. 53963. The Court of Appeals decision reversed and set
aside the Decision2 dated May 13, 1996 of Branch 217 of the Regional Trial Court of Quezon City in Civil Case No.
Q-93-18582.1âwphi1.nêt

The case was originally filed on December 10, 1993 by Paterno Inquing, Irene Guillermo and Federico Bantugan,
herein respondents, against Rosencor Development Corporation (hereinafter "Rosencor"), Rene Joaquin, and
Eufrocina de Leon. Originally, the complaint was one for annulment of absolute deed of sale but was later amended to
one for rescission of absolute deed of sale. A complaint-for intervention was thereafter filed by respondents Fernando
Magbanua and Danna Lizza Tiangco. The complaint-in-intervention was admitted by the trial court in an Order dated
May 4, 1994.3

The facts of the case, as stated by the trial court and adopted by the appellate court, are as follows:

"This action was originally for the annulment of the Deed of Absolute Sale dated September 4, 1990 between
defendants Rosencor and Eufrocina de Leon but later amended (sic) praying for the rescission of the deed of sale.

Plaintiffs and plaintiffs-intervenors averred that they are the lessees since 1971 of a two-story residential apartment
located at No. 150 Tomas Morato Ave., Quezon City covered by TCT No. 96161 and owned by spouses Faustino and
Cresencia Tiangco. The lease was not covered by any contract. The lessees were renting the premises then for P150.00
a month and were allegedly verbally granted by the lessors the pre-emptive right to purchase the property if ever they
decide to sell the same.

Upon the death of the spouses Tiangcos in 1975, the management of the property was adjudicated to their heirs who
were represented by Eufrocina de Leon. The lessees were allegedly promised the same pre-emptive right by the heirs
of Tiangcos since the latter had knowledge that this right was extended to the former by the late spouses Tiangcos.
The lessees continued to stay in the premises and allegedly spent their own money amounting from P50,000.00 to
P100,000.00 for its upkeep. These expenses were never deducted from the rentals which already increased to
P1,000.00.

In June 1990, the lessees received a letter from Atty. Erlinda Aguila demanding that they vacate the premises so that
the demolition of the building be undertaken. They refused to leave the premises. In that same month, de Leon refused
to accept the lessees’ rental payment claiming that they have run out of receipts and that a new collector has been
assigned to receive the payments. Thereafter, they received a letter from Eufrocina de Leon offering to sell to them the
property they were leasing for P2,000,000.00. xxx.

The lessees offered to buy the property from de Leon for the amount of P1,000,000.00. De Leon told them that she
will be submitting the offer to the other heirs. Since then, no answer was given by de Leon as to their offer to buy the
property. However, in November 1990, Rene Joaquin came to the leased premises introducing himself as its new
owner.

In January 1991, the lessees again received another letter from Atty. Aguila demanding that they vacate the premises.
A month thereafter, the lessees received a letter from de Leon advising them that the heirs of the late spouses Tiangcos
have already sold the property to Rosencor. The following month Atty. Aguila wrote them another letter demanding
the rental payment and introducing herself as counsel for Rosencor/Rene Joaquin, the new owners of the premises.

66
The lessees requested from de Leon why she had disregarded the pre-emptive right she and the late Tiangcos have
promised them. They also asked for a copy of the deed of sale between her and the new owners thereof but she refused
to heed their request. In the same manner, when they asked Rene Joaquin a copy of the deed of sale, the latter turned
down their request and instead Atty. Aguila wrote them several letters demanding that they vacate the premises. The
lessees offered to tender their rental payment to de Leon but she refused to accept the same.

In April 1992 before the demolition can be undertaken by the Building Official, the barangay interceded between the
parties herein after which Rosencor raised the issue as to the rental payment of the premises. It was also at this
instance that the lessees were furnished with a copy of the Deed of Sale and discovered that they were deceived by de
Leon since the sale between her and Rene Joaquin/Rosencor took place in September 4, 1990 while de Leon made the
offer to them only in October 1990 or after the sale with Rosencor had been consummated. The lessees also noted that
the property was sold only for P726,000.00.

The lessees offered to reimburse de Leon the selling price of P726,000.00 plus an additional P274,000.00 to complete
their P1,000.000.00 earlier offer. When their offer was refused, they filed the present action praying for the following:
a) rescission of the Deed of Absolute Sale between de Leon and Rosencor dated September 4, 1990; b) the defendants
Rosencor/Rene Joaquin be ordered to reconvey the property to de Leon; and c) de Leon be ordered to reimburse the
plaintiffs for the repairs of the property, or apply the said amount as part of the price for the purchase of the property
in the sum of P100,000.00."4

After trial on the merits, the Regional Trial Court rendered a Decision5 dated May 13, 1996 dismissing the complaint.
The trial court held that the right of redemption on which the complaint. The trial court held that the right of
redemption on which the complaint was based was merely an oral one and as such, is unenforceable under the law.
The dispositive portion of the May 13, 1996 Decision is as follows:

"WHEREFORE, in view of the foregoing, the Court DISMISSES the instant action. Plaintiffs and plaintiffs-
intervenors are hereby ordered to pay their respective monthly rental of P1,000.00 per month reckoned from May
1990 up to the time they leave the premises. No costs.

SO ORDERED."6

Not satisfied with the decision of the trial court, respondents herein filed a Notice of Appeal dated June 3, 1996. On
the same date, the trial court issued an Order for the elevation of the records of the case to the Court of Appeals. On
August 8, 1997, respondents filed their appellate brief before the Court of Appeals.

On June 25, 1999, the Court of Appeals rendered its decision7 reversing the decision of the trial court. The dispositive
portion of the June 25, 1999 decision is as follows:

"WHEREFORE, premises considered, the appealed decision (dated May 13, 1996) of the Regional Trial Court
(Branch 217) in Quezon City in Case No. Q-93-18582 is hereby REVERSED and SET ASIDE. In its stead, a new one
is rendered ordering:

(1) The rescission of the Deed of Absolute Sale executed between the appellees on September 4, 1990;

(2) The reconveyance of the subject premises to appellee Eufrocina de Leon;

(3) The heirs of Faustino and Crescencia Tiangco, thru appellee Eufrocina de Leon, to afford the appellants thirty days
within which to exercise their right of first refusal by paying the amount of ONE MILLION PESOS (P1,000,000.00)
for the subject property; and

(4) The appellants to, in turn, pay the appellees back rentals from May 1990 up to the time this decision is
promulgated.

No pronouncement as to costs.

SO ORDERED".8

Petitioners herein filed a Motion for Reconsideration of the decision of the Court of Appeals but the same was denied
in a Resolution dated October 15, 1999.9

67
Hence, this petition for review on certiorari where petitioners Rosencor Development Corporation and Rene Joaquin
raise the following assignment of errors10:

I.

THE COURT OF APPEALS GRAVELY ERRED WHEN IT ORDERED THE RESCISSION OF THE ABSOLUTE
DEED OF SALE BETWEEN EUFROCINA DE LEON AND PETITIONER ROSENCOR.

II.

THE COURT OF APPEALS COMMTITED MANIFEST ERROR IN MANDATING THAT EUFROCINA DE

LEON AFFORD RESPONDENTS THE OPPORTUNITY TO EXERCISE THEIR RIGHT OF FIRST REFUSAL.

III.

THE COURT OF APPEALS GRIEVOUSLY ERRED IN CONCLUDING THAT RESPONDENTS HAVE

ESTABLISHED THEIR RIGHT OF FIRST REFUSAL DESPITE PETITIONERS’ RELIANCE ON THEIR
DEFENSE BASED ON THE STATUTE OF FRAUDS.

Eufrocina de Leon, for herself and for the heirs of the spouses Faustino and Crescencia Tiangco, did not appeal the
decision of the Court of Appeals.

At the onset, we not that both the Court of Appeals and the Regional Trial Court relied on Article 1403 of the New
Civil Code, more specifically the provisions on the statute of frauds, in coming out with their respective decisions.
The trial court, in denying the petition for reconveyance, held that right of first refusal relied upon by petitioners was
not reduced to writing and as such, is unenforceable by virtue of the said article. The Court of Appeals, on the other
hand, also held that the statute of frauds governs the "right of first refusal" claimed by respondents. However, the
appellate court ruled that respondents had duly proven the same by reason of petitioners’ waiver of the protection of
the statute by reason of their failure to object to the presentation of oral evidence of the said right.

Both the appellate court and the trial court failed to discuss, however, the threshold issue of whether or not a right of
first refusal is indeed covered by the provisions of the New Civil Code on the statute of frauds. The resolution of the
issue on the applicability of the statute of frauds is important as it will determine the type of evidence which may be
considered by the trial court as proof of the alleged right of first refusal.

The term "statute of frauds" is descriptive of statutes which require certain classes of contracts to be in writing. This
statute does not deprive the parties of the right to contract with respect to the matters therein involved , but merely
regulates the formalities of the contract necessary to render it enforceable. Thus, they are included in the provisions of
the New Civil Code regarding unenforceable contracts, more particularly Art. 1403, paragraph 2. Said article provides,
as follows:

"Art. 1403. The following contracts are unenforceable, unless they are ratified:

xxx

(2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an
agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be
in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence of its contents:

a) An agreement that by its terms is not to be performed within a year from the making thereof;

b) A special promise to answer for the debt, default, or miscarriage of another;

c) An agreement made in consideration of marriage, other than a mutual promise to marry;

d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless
the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in
action, or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by
the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price,
names of purchasers and person on whose account the sale is made, it is a sufficient memorandum;
68
e) An agreement for the leasing of a longer period than one year, or for the sale of real property or of an interest
therein;

f) A representation to the credit of a third person."

The purpose of the statute is to prevent fraud and perjury in the enforcement of obligations depending for their
evidence on the unassisted memory of witnesses by requiring certain enumerated contracts and transactions to be
evidenced by a writing signed by the party to be charged. 11 Moreover, the statute of frauds refers to specific kinds of
transactions and cannot apply to any other transaction that is not enumerated therein.12 The application of such statute
presupposes the existence of a perfected contract. 13

The question now is whether a "right of first refusal" is among those enumerated in the list of contracts covered by the
Statute of Frauds. More specifically, is a right of first refusal akin to "an agreement for the leasing of a longer period
than one year, or for the sale of real property or of an interest therein" as contemplated by Article 1403, par. 2(e) of the
New Civil Code.

We have previously held that not all agreements "affecting land" must be put into writing to attain enforceability. 14
Thus, we have held that the setting up of boundaries,15 the oral partition of real property16, and an agreement creating a
right of way17 are not covered by the provisions of the statute of frauds. The reason simply is that these agreements are
not among those enumerated in Article 1403 of the New Civil Code.

A right of first refusal is not among those listed as unenforceable under the statute of frauds. Furthermore, the
application of Article 1403, par. 2(e) of the New Civil Code presupposes the existence of a perfected, albeit unwritten,
contract of sale.18 A right of first refusal, such as the one involved in the instant case, is not by any means a perfected
contract of sale of real property. At best, it is a contractual grant, not of the sale of the real property involved, but of
the right of first refusal over the property sought to be sold 19.

It is thus evident that the statute of frauds does not contemplate cases involving a right of first refusal. As such, a right
of first refusal need not be written to be enforceable and may be proven by oral evidence.

The next question to be ascertained is whether or not respondents have satisfactorily proven their right of first refusal
over the property subject of the Deed of Absolute Sale dated September 4, 1990 between petitioner Rosencor and
Eufrocina de Leon.

On this point, we agree with the factual findings of the Court of Appeals that respondents have adequately proven the
existence of their right of first refusal. Federico Bantugan, Irene Guillermo, and Paterno Inquing uniformly testified
that they were promised by the late spouses Faustino and Crescencia Tiangco and, later on, by their heirs a right of
first refusal over the property they were currently leasing should they decide to sell the same. Moreover, respondents
presented a letter20 dated October 9, 1990 where Eufrocina de Leon, the representative of the heirs of the spouses
Tiangco, informed them that they had received an offer to buy the disputed property for P2,000,000.00 and offered to
sell the same to the respondents at the same price if they were interested . Verily, if Eufrocina de Leon did not
recognize respondents’ right of first refusal over the property they were leasing, then she would not have bothered to
offer the property for sale to the respondents.

It must be noted that petitioners did not present evidence before the trial court contradicting the existence of the right
of first refusal of respondents over the disputed property. They only presented petitioner Rene Joaquin, the vice-
president of petitioner Rosencor, who admitted having no personal knowledge of the details of the sales transaction
between Rosencor and the heirs of the spouses Tiangco 21. They also dispensed with the testimony of Eufrocina de
Leon22 who could have denied the existence or knowledge of the right of first refusal. As such, there being no
evidence to the contrary, the right of first refusal claimed by respondents was substantially proven by respondents
before the lower court.

Having ruled upon the question as to the existence of respondents’ right of first refusal, the next issue to be answered
is whether or not the Court of Appeals erred in ordering the rescission of the Deed of Absolute Sale dated September
4, 1990 between Rosencor and Eufrocina de Leon and in decreeing that the heirs of the spouses Tiangco should afford
respondents the exercise of their right of first refusal. In other words, may a contract of sale entered into in violation of
a third party’s right of first refusal be rescinded in order that such third party can exercise said right?

The issue is not one of first impression.

69
In Guzman, Bocaling and Co, Inc. vs. Bonnevie23, the Court upheld the decision of a lower court ordering the
rescission of a deed of sale which violated a right of first refusal granted to one of the parties therein. The Court held:

"xxx Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381 (3) of the Civil Code, a contract
otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors. The
status of creditors could be validly accorded the Bonnevies for they had substantial interests that were prejudiced by
the sale of the subject property to the petitioner without recognizing their right of first priority under the Contract of
Lease.

According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third persons, to
secure reparations for damages caused to them by a contract, even if this should be valid, by means of the restoration
of things to their condition at the moment prior to the celebration of said contract. It is a relief allowed for the
protection of one of the contracting parties and even third persons from all injury and damage the contract may cause,
or to protect some incompatible and preferent right created by the contract. Rescission implies a contract which, even
if initially valid, produces a lesion or pecuniary damage to someone that justifies its invalidation for reasons of equity.

It is true that the acquisition by a third person of the property subject of the contract is an obstacle to the action for its
rescission where it is shown that such third person is in lawful possession of the subject of the contract and that he did
not act in bad faith. However, this rule is not applicable in the case before us because the petitioner is not considered a
third party in relation to the Contract of Sale nor may its possession of the subject property be regarded as acquired
lawfully and in good faith.

Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover, the petitioner cannot be deemed
a purchaser in good faith for the record shows that it categorically admitted that it was aware of the lease in favor of
the Bonnevies, who were actually occupying the subject property at the time it was sold to it. Although the occupying
the subject property at the time it was sold to it. Although the Contract of Lease was not annotated on the transfer
certificate of title in the name of the late Jose Reynoso and Africa Reynoso, the petitioner cannot deny actual
knowledge of such lease which was equivalent to and indeed more binding than presumed notice by registration.

A purchaser in good faith and for value is one who buys the property of another without notice that some other person
has a right to or interest in such property without and pays a full and fair price for the same at the time of such
purchase or before he has notice of the claim or interest of some other person in the property. Good faith connotes an
honest intention to abstain from taking unconscientious advantage of another. Tested by these principles, the petitioner
cannot tenably claim to be a buyer in good faith as it had notice of the lease of the property by the Bonnevies and such
knowledge should have cautioned it to look deeper into the agreement to determine if it involved stipulations that
would prejudice its own interests."

Subsequently24 in Equatorial Realty and Development, Inc. vs. Mayfair Theater, Inc.25, the Court, en banc, with three
justices dissenting,26 ordered the rescission of a contract entered into in violation of a right of first refusal. Using the
ruling in Guzman Bocaling & Co., Inc. vs. Bonnevie as basis, the Court decreed that since respondent therein had a
right of first refusal over the said property, it could only exercise the said right if the fraudulent sale is first set aside or
rescinded. Thus:

"What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that Mayfair will have the right of
first refusal in the event Carmelo sells the leased premises. It is undisputed that Carmelo did recognize this right of
Mayfair, for it informed the latter of its intention to sell the said property in 1974. There was an exchange of letters
evidencing the offer and counter-offers made by both parties. Carmelo, however, did not pursue the exercise to its
logical end. While it initially recognized Mayfair’s right of first refusal, Carmelo violated such right when without
affording its negotiations with Mayfair the full process to ripen to at least an interface of a definite offer and a possible
corresponding acceptance within the "30-day exclusive option" time granted Mayfair, Carmelo abandoned
negotiations, kept a low profile for some time, and then sold, without prior notice to Mayfair, the entire Claro M.
Recto property to Equatorial.

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question, rescissible. We
agree with respondent Appellate Court that the records bear out the fact that Equatorial was aware of the lease
contracts because its lawyers had, prior to the sale, studied the said contracts. As such, Equatorial cannot tenably claim
that to be a purchaser in good faith, and, therefore, rescission lies.

XXX

70
As also earlier emphasized, the contract of sale between Equatorial and Carmelo is characterized by bad faith, since it
was knowingly entered into in violation of the rights of and to the prejudice of Mayfair. In fact, as correctly observed
by the Court of Appeals, Equatorial admitted that its lawyers had studied the contract or lease prior to the sale.
Equatorial’s knowledge of the stipulations therein should have cautioned it to look further into the agreement to
determine if it involved stipulations that would prejudice its own interests.

Since Mayfair had a right of first refusal, it can exercise the right only if the fraudulent sale is first set aside or
rescinded. All of these matters are now before us and so there should be no piecemeal determination of this case and
leave festering sores to deteriorate into endless litigation. The facts of the case and considerations of justice and equity
require that we order rescission here and now. Rescission is a relief allowed for the protection of one of the
contracting parties and even third persons from all injury and damage the contract may cause or to protect some
incompatible and preferred right by the contract. The sale of the subject real property should now be rescinded
considering that Mayfair, which had substantial interest over the subject property, was prejudiced by the sale of the
subject property to Equatorial without Carmelo conferring to Mayfair every opportunity to negotiate within the 30-day
stipulate periond.27

In Paranaque Kings Enterprises, Inc. vs. Court of Appeals,28 the Court held that the allegations in a complaint
showing violation of a contractual right of "first option or priority to buy the properties subject of the lease" constitute
a valid cause of action enforceable by an action for specific performance. Summarizing the rulings in the two
previously cited cases, the Court affirmed the nature of and concomitant rights and obligations of parties under a right
of first refusal. Thus:

"We hold however, that in order to have full compliance with the contractual right granting petitioner the first option
to purchase, the sale of the properties for the amount of P9,000,000.00, the price for which they were finally sold to
respondent Raymundo, should have likewise been offered to petitioner.

The Court has made an extensive and lengthy discourse on the concept of, and obligations under, a right of first
refusal in the case of Guzman, Bocaling & Co. vs. Bonnevie. In that case, under a contract of lease, the lessees (Raul
and Christopher Bonnevie) were given a "right of first priority" to purchase the leased property in case the lessor
(Reynoso) decided to sell. The selling price quoted to the Bonnevies was 600,000.00 to be fully paid in cash, less a
mortgage lien of P100,000.00. On the other hand, the selling price offered by Reynoso to and accepted by Guzman
was only P400,000.00 of which P137,500.00 was to be paid in cash while the balance was to be paid only when the
property was cleared of occupants. We held that even if the Bonnevies could not buy it at the price quoted
(P600,000.00), nonetheless, Reynoso could not sell it to another for a lower price and under more favorable terms and
conditions without first offering said favorable terms and price to the Bonnevies as well. Only if the Bonnevies failed
to exercise their right of first priority could Reynoso thereafter lawfully sell the subject property to others, and only
under the same terms and conditions previously offered to the Bonnevies.

XXX

This principle was reiterated in the very recent case of Equatorial Realty vs. Mayfair Theater, Inc. which was decided
en banc. This Court upheld the right of first refusal of the lessee Mayfair, and rescinded the sale of the property by the
lessor Carmelo to Equatorial Realty "considering that Mayfair, which had substantial interest over the subject
property, was prejudiced by its sale to Equatorial without Carmelo conferring to Mayfair every opportunity to
negotiate within the 30-day stipulated period"

In that case, two contracts of lease between Carmelo and Mayfair provided "that if the LESSOR should desire to sell
the leased premises, the LESSEE shall be given 30 days exclusive option to purchase the same." Carmelo initially
offered to sell the leased property to Mayfair for six to seven million pesos. Mayfair indicated interest in purchasing
the property though it invoked the 30-day period. Nothing was heard thereafter from Carmelo. Four years later, the
latter sold its entire Recto Avenue property, including the leased premises, to Equatorial for P11,300,000.00 without
priorly informing Mayfair. The Court held that both Carmelo and Equatorial acted in bad faith: Carmelo or knowingly
violating the right of first option of Mayfair, and Equatorial for purchasing the property despite being aware of the
contract stipulation. In addition to rescission of the contract of sale, the Court ordered Carmelo to allow Mayfair to
buy the subject property at the same price of P11,300,000.00.

In the recent case of Litonjua vs L&R Corporation,29 the Court, also citing the case of Guzman, Bocaling & Co. vs.
Bonnevie, held that the sale made therein in violation of a right of first refusal embodied in a mortgage contract, was
rescissible. Thus:

71
"While petitioners question the validity of paragraph 8 of their mortgage contract, they appear to be silent insofar as
paragraph 9 thereof is concerned. Said paragraph 9 grants upon L&R Corporation the right of first refusal over the
mortgaged property in the event the mortgagor decides to sell the same. We see nothing wrong in this provision. The
right of first refusal has long been recognized as valid in our jurisdiction. The consideration for the loan mortgage
includes the consideration for the right of first refusal. L&R Corporation is in effect stating that it consents to lend out
money to the spouses Litonjua provided that in case they decide to sell the property mortgaged to it, then L&R
Corporation shall be given the right to match the offered purchase price and to buy the property at that price. Thus,
while the spouses Litonjua had every right to sell their mortgaged property to PWHAS without securing the prior
written consent of L&R Corporation, they had the obligation under paragraph 9, which is a perfectly valid provision,
to notify the latter of their intention to sell the property and give it priority over other buyers. It is only upon the failure
of L&R Corporation to exercise its right of first refusal could the spouses Litonjua validly sell the subject properties to
the others, under the same terms and conditions offered to L&R Corporation.

What then is the status of the sale made to PWHAS in violation of L & R Corporation’s contractual right of first
refusal? On this score, we agree with the Amended Decision of the Court of Appeals that the sale made to PWHAS is
rescissible. The case of Guzman, Bocaling & Co. v. Bonnevie is instructive on this point.

XXX

It was then held that the Contract of Sale there, which violated the right of first refusal, was rescissible.

In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to L & R Corporation over the
subject properties since the Deed of Real Estate Mortgage containing such a provision was duly registered with the
Register of Deeds. As such, PWHAS is presumed to have been notified thereof by registration, which equates to
notice to the whole world.

XXX

All things considered, what then are the relative rights and obligations of the parties? To recapitulate: the sale between
the spouses Litonjua and PWHAS is valid, notwithstanding the absence of L & R Corporation’s prior written consent
thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem and its tender of the redemption price, as
successor-in-interest of the spouses Litonjua, within the one-year period should have been accepted as valid by the L
& R Corporation. However, while the sale is, indeed, valid, the same is rescissible because it ignored L & R
Corporation’s right of first refusal."

Thus, the prevailing doctrine, as enunciated in the cited cases, is that a contract of sale entered into in violation of a
right of first refusal of another person, while valid, is rescissible.

There is, however, a circumstance which prevents the application of this doctrine in the case at bench. In the cases
cited above, the Court ordered the rescission of sales made in violation of a right of first refusal precisely because the
vendees therein could not have acted in good faith as they were aware or should have been aware of the right of first
refusal granted to another person by the vendors therein. The rationale for this is found in the provisions of the New
Civil Code on rescissible contracts. Under Article 1381 of the New Civil Code, paragraph 3, a contract validly agreed
upon may be rescinded if it is "undertaken in fraud of creditors when the latter cannot in any manner collect the claim
due them." Moreover, under Article 1385, rescission shall not take place "when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith." 30

It must be borne in mind that, unlike the cases cited above, the right of first refusal involved in the instant case was an
oral one given to respondents by the deceased spouses Tiangco and subsequently recognized by their heirs. As such, in
order to hold that petitioners were in bad faith, there must be clear and convincing proof that petitioners were made
aware of the said right of first refusal either by the respondents or by the heirs of the spouses Tiangco.

It is axiomatic that good faith is always presumed unless contrary evidence is adduced. 31 A purchaser in good faith is
one who buys the property of another without notice that some other person has a right or interest in such a property
and pays a full and fair price at the time of the purchase or before he has notice of the claim or interest of some other
person in the property.32 In this regard, the rule on constructive notice would be inapplicable as it is undisputed that
the right of first refusal was an oral one and that the same was never reduced to writing, much less registered with the
Registry of Deeds. In fact, even the lease contract by which respondents derive their right to possess the property
involved was an oral one.

72
On this point, we hold that the evidence on record fails to show that petitioners acted in bad faith in entering into the
deed of sale over the disputed property with the heirs of the spouses Tiangco. Respondents failed to present any
evidence that prior to the sale of the property on September 4, 1990, petitioners were aware or had notice of the oral
right of first refusal.

Respondents point to the letter dated June 1, 1990 33 as indicative of petitioners’ knowledge of the said right. In this
letter, a certain Atty. Erlinda Aguila demanded that respondent Irene Guillermo vacate the structure they were
occupying to make way for its demolition.

We fail to see how the letter could give rise to bad faith on the part of the petitioner. No mention is made of the right
of first refusal granted to respondents. The name of petitioner Rosencor or any of it officers did not appear on the
letter and the letter did not state that Atty. Aguila was writing in behalf of petitioner. In fact, Atty. Aguila stated
during trial that she wrote the letter in behalf of the heirs of the spouses Tiangco. Moreover, even assuming that Atty.
Aguila was indeed writing in behalf of petitioner Rosencor, there is no showing that Rosencor was aware at that time
that such a right of first refusal existed.

Neither was there any showing that after receipt of this June 1, 1990 letter, respondents notified Rosencor or Atty.
Aguila of their right of first refusal over the property. Respondents did not try to communicate with Atty. Aguila and
inform her about their preferential right over the disputed property. There is even no showing that they contacted the
heirs of the spouses Tiangco after they received this letter to remind them of their right over the property.

Respondents likewise point to the letter dated October 9, 1990 of Eufrocina de Leon, where she recognized the right
of first refusal of respondents, as indicative of the bad faith of petitioners. We do not agree. Eufrocina de Leon wrote
the letter on her own behalf and not on behalf of petitioners and, as such, it only shows that Eufrocina de Leon was
aware of the existence of the oral right of first refusal. It does not show that petitioners were likewise aware of the
existence of the said right. Moreover, the letter was made a month after the execution of the Deed of Absolute Sale on
September 4, 1990 between petitioner Rosencor and the heirs of the spouses Tiangco. There is no showing that prior
to the date of the execution of the said Deed, petitioners were put on notice of the existence of the right of first refusal.

Clearly, if there was any indication of bad faith based on respondents’ evidence, it would only be on the part of
Eufrocina de Leon as she was aware of the right of first refusal of respondents yet she still sold the disputed property
to Rosencor. However, bad faith on the part of Eufrocina de Leon does not mean that petitioner Rosencor likewise
acted in bad faith. There is no showing that prior to the execution of the Deed of Absolute Sale, petitioners were made
aware or put on notice of the existence of the oral right of first refusal. Thus, absent clear and convincing evidence to
the contrary, petitioner Rosencor will be presumed to have acted in good faith in entering into the Deed of Absolute
Sale over the disputed property.

Considering that there is no showing of bad faith on the part of the petitioners, the Court of Appeals thus erred in
ordering the rescission of the Deed of Absolute Sale dated September 4, 1990 between petitioner Rosencor and the
heirs of the spouses Tiangco. The acquisition by Rosencor of the property subject of the right of first refusal is an
obstacle to the action for its rescission where, as in this case, it was shown that Rosencor is in lawful possession of the
subject of the contract and that it did not act in bad faith. 34

This does not mean however that respondents are left without any remedy for the unjustified violation of their right of
first refusal. Their remedy however is not an action for the rescission of the Deed of Absolute Sale but an action for
damages against the heirs of the spouses Tiangco for the unjustified disregard of their right of first refusal 35.

WHEREFORE, premises considered, the decision of the Court of Appeals dated June 25, 1999 is REVERSED and
SET ASIDE. The Decision dated May 13, 1996 of the Quezon City Regional Trial Court, Branch 217 is hereby
REINSTATED insofar as it dismisses the action for rescission of the Deed of Absolute Sale dated September 4, 1990
and orders the payment of monthly rentals of P1,000.00 per month reckoned from May 1990 up to the time
respondents leave the premises.

SO ORDERED.

73
 ECOND DIVISION

[G.R. NO. 152411 : September 29, 2004]

UNIVERSITY OF THE PHILIPPINES, Petitioner, v. PHILAB INDUSTRIES, INC., Respondent.

DECISION

CALLEJO, SR., J.:

Before the Court is a Petition for Review on Certiorari of the Decision1 of the Court of Appeals in CA-G.R. CV No.
44209, as well as its Resolution 2 denying the petitioner's motion for the reconsideration thereof. The mo1 mo2 Court of
Appeals set aside the Decision3 of Branch 150 of the Regional Trial Court (RTC) of Makati City, which dismissed the
complaint of the respondent against the petitioner for sum of money and damages.

The Facts of the Case

Sometime in 1979, the University of the Philippines (UP) decided to construct an integrated system of research
organization known as the Research Complex. As part of the project, laboratory equipment and furniture were
purchased for the National Institute of Biotechnology and Applied Microbiology (BIOTECH) at the UP Los Baños.
Providentially, the Ferdinand E. Marcos Foundation (FEMF) came forward and agreed to fund the acquisition of the
laboratory furniture, including the fabrication thereof.

Renato E. Lirio, the Executive Assistant of the FEMF, gave the go-signal to BIOTECH to contact a corporation to
accomplish the project. On July 23, 1982, Dr. William Padolina, the Executive Deputy Director of BIOTECH,
arranged for Philippine Laboratory Industries, Inc. (PHILAB), to fabricate the laboratory furniture and deliver the
same to BIOTECH for the BIOTECH Building Project, for the account of the FEMF. Lirio directed Padolina to give
the go-signal to PHILAB to proceed with the fabrication of the laboratory furniture, and requested Padolina to forward
the contract of the project to FEMF for its approval.

On July 13, 1982, Padolina wrote Lirio and requested for the issuance of the purchase order and downpayment for the
office and laboratory furniture for the project, thus:

1
. Supply and Installation of
Laboratory furniture for the
BIOTECH Building Project

Amount : P2,934,068.90

Supplier : Philippine Laboratory Furniture

Co.,
College, Laguna

Attention : Mr. Hector C. Navasero

President

Downpaym : 40% or P1,173,627.56

ent

2 Fabrication and Supply of office furniture for the

. BIOTECH Building Project

Amount : P573,375.00

74
 Supplier : Trans-Oriental Woodworks, Inc.
1st Avenue, Bagumbayan
Tanyag, Taguig, Metro Manila

Downpaym : 50% or P286,687.504

ent

Padolina assured Lirio that the contract would be prepared as soon as possible before the issuance of the purchase
orders and the downpayment for the goods, and would be transmitted to the FEMF as soon as possible.

In a Letter dated July 23, 1982, Padolina informed Hector Navasero, the President of PHILAB, to proceed with the
fabrication of the laboratory furniture, per the directive of FEMF Executive Assistant Lirio. Padolina also requested
for copies of the shop drawings and a sample contract 5 for the project, and that such contract and drawings had to be
finalized before the down payment could be remitted to the PHILAB the following week. However, PHILAB failed to
forward any sample contract.

Subsequently, PHILAB made partial deliveries of office and laboratory furniture to BIOTECH after having been duly
inspected by their representatives and FEMF Executive Assistant Lirio.

On August 24, 1982, FEMF remitted P600,000 to PHILAB as downpayment for the laboratory furniture for the
BIOTECH project, for which PHILAB issued Official Receipt No. 253 to FEMF. On October 22, 1982, FEMF made
another partial payment of P800,000 to PHILAB, for which the latter issued Official Receipt No. 256 to FEMF. The
remittances were in the form of checks drawn by FEMF and delivered to PHILAB, through Padolina.

On October 16, 1982, UP, through Emil Q. Javier, the Chancellor of UP Los Baños and FEMF, represented by its
Executive Officer, Rolando Gapud, executed a Memorandum of Agreement (MOA) in which FEMF agreed to grant
financial support and donate sums of money to UP for the construction of buildings, installation of laboratory and
other capitalization for the project, not to exceed P29,000,000.00. The obligations of FEMF under the MOA are the
following:

ARTICLE II

OBLIGATIONS OF THE FOUNDATION

2.1. The FOUNDATION, in carrying out its principal objectives of promoting philantrophic and
scientific projects through financial support to such projects that will contribute to the country's
economic development, shall grant such financial support and donate such sums of money to the
RESEARCH COMPLEX as may be necessary for the construction of buildings, installation of
laboratories, setting up of offices and physical plants and facilities and other capital investment of the
RESEARCH COMPLEX and/or any of its component Research Institutes not to exceed P29 Million. For
this purpose, the FOUNDATION shall:

(a) Acquire and donate to the UNIVERSITY the site for the RESEARCH COMPLEX;
andcralawlibrary

(b) Donate or cause to be donated to the UNIVERSITY the sum of TWENTY-NINE

MILLION PESOS (P29,000,000.00) for the construction of the buildings of the National
Institutes of Biotechnology and Applied Microbiology (BIOTECH) and the installation of
their laboratories and their physical plants and other facilities to enable them to commence
operations.

2.2. In addition, the FOUNDATION shall, subject to the approval of the Board of Trustees of the
FOUNDATION, continue to support the activities of the RESEARCH COMPLEX by way of recurrent
additional grants and donations for specific research and development projects which may be mutually
agreed upon and, from time to time, additional grants and donations of such amounts as may be
necessary to provide the RESEARCH COMPLEX and/or any of its Research Institutes with operational
flexibility especially with regard to incentives to staff purchase of equipment/facilities, travel abroad,

75
 recruitment of local and expatriate staff and such other activities and inputs which are difficult to obtain
under usual government rules and regulations.6

The Board of Regents of the UP approved the MOA on November 25, 1982. 7

In the meantime, Navasero promised to submit the contract for the installation of laboratory furniture to BIOTECH,
by January 12, 1983. However, Navasero failed to do so. In a Letter dated February 1, 1983, BIOTECH reminded
Navasero of the need to submit the contract so that it could be submitted to FEMF for its evaluation and approval. 8
Instead of submitting the said contract, PHILAB submitted to BIOTECH an accomplishment report on the project as
of February 28, 1983, and requested payment thereon. 9 By May 1983, PHILAB had completed 78% of the project,
amounting to P2,288,573.74 out of the total cost of P2,934,068.90. The FEMF had already paid forty percent (40%) of
the total cost of the project. On May 12, 1983, Padolina wrote Lirio and furnished him the progress billing from
PHILAB.10 On August 11, 1983, the FEMF made another partial payment of P836,119.52 representing the already
delivered laboratory and office furniture after the requisite inspection and verification thereof by representatives from
the BIOTECH, FEMF, and PHILAB. The payment was made in the form of a check, for which PHILAB issued
Official Receipt No. 202 to FEMF through Padolina.11

On July 1, 1984, PHILAB submitted to BIOTECH Invoice No. 01643 in the amount of P702,939.40 for the final
payment of laboratory furniture. Representatives from BIOTECH, PHILAB, and Lirio for the FEMF, conducted a
verification of the accomplishment of the work and confirmed the same. BIOTECH forwarded the invoice to Lirio on
December 18, 1984 for its payment.12 Lirio, in turn, forwarded the invoice to Gapud, presumably sometime in the
early part of 1985. However, the FEMF failed to pay the bill. PHILAB reiterated its request for payment through a
letter on May 9, 1985.13 BIOTECH again wrote Lirio on March 21, 1985, requesting the payment of PHILAB's bill. 14
It sent another letter to Gapud, on November 22, 1985, again appealing for the payment of PHILAB's bill. 15 In a Letter
to BIOTECH dated December 5, 1985, PHILAB requested payment of P702,939.40 plus interest thereon of
P224,940.61.16 There was, however, no response from the FEMF. On February 24, 1986, PHILAB wrote BIOTECH,
appealing for the payment of its bill even on installment basis. 17

President Marcos was ousted from office during the February 1986 EDSA Revolution. On March 26, 1986, Navasero
wrote BIOTECH requesting for its much-needed assistance for the payment of the balance already due plus interest of
P295,234.55 for its fabrication and supply of laboratory furniture. 18

On April 22, 1986, PHILAB wrote President Corazon C. Aquino asking her help to secure the payment of the amount
due from the FEMF.19 The letter was referred to then Budget Minister Alberto Romulo, who referred the letter to then
UP President Edgardo Angara on June 9, 1986. On September 30, 1986, Raul P. de Guzman, the Chancellor of UP
Los Baños, wrote then Chairman of the Presidential Commission on Good Government (PCGG) Jovito Salonga,
submitting PHILAB's claim to be officially entered as "accounts payable" as soon as the assets of FEMF were
liquidated by the PCGG.20

In the meantime, the PCGG wrote UP requesting for a copy of the relevant contract and the MOA for its perusal. 21

Chancellor De Guzman wrote Navasero requesting for a copy of the contract executed between PHILAB and FEMF.
In a Letter dated October 20, 1987, Navasero informed De Guzman that PHILAB and FEMF did not execute any
contract regarding the fabrication and delivery of laboratory furniture to BIOTECH.

Exasperated, PHILAB filed a complaint for sum of money and damages against UP. In the complaint, PHILAB
prayed that it be paid the following:

(1) PESOS: SEVEN HUNDRED TWO THOUSAND NINE HUNDRED THIRTY NINE & 40/100
(P702,939.40) plus an additional amount (as shall be determined during the hearing) to cover the actual
cost of money which at the time of transaction the value of the peso was eleven to a dollar (P11.00:$1)
and twenty seven (27%) percent interest on the total amount from August 1982 until fully paid;

(2) PESOS: ONE HUNDRED THOUSAND (P100,000.00) exemplary damages;

(3) FIFTY THOUSAND [PESOS] (P50,000.00) as and for attorney's fees; andcralawlibrary

(4) Cost of suit.22

PHILAB alleged, inter alia, that:

76
 3. Sometime in August 1982, defendant, through its officials, particularly MR. WILLIAM PADOLINA,
Director, asked plaintiff to supply and install several laboratory furnitures and equipment at BIOTECH,
a research laboratory of herein defendant located at its campus in College, Laguna, for a total contract
price of PESOS: TWO MILLION NINE HUNDRED THIRTY-NINE THOUSAND FIFTY-EIGHT &
90/100 (P2,939,058.90);

4. After the completion of the delivery and installation of said laboratory furnitures and equipment at
defendant's BIOTECH Laboratory, defendant paid three (3) times on installment basis:

a) P600,000.00 as per Official Receipt No. 253 dated August 24, 1982;

b) P800,000.00 as per Official Receipt No. 256 dated October 22, 1982;

c) P836,119.52 as per Official Receipt No. 202 dated August 11, 1983;

thus leaving a balance of PESOS: SEVEN HUNDRED TWO THOUSAND NINE HUNDRED
THIRTY-NINE & 40/100 (P702,939.40).

5. That notwithstanding repeated demands for the past eight years, defendant arrogantly and maliciously
made plaintiff believe that it was going to pay the balance aforestated, that was why plaintiff's President
and General Manager himself, HECTOR C. NAVASERO, personally went to and from UP Los Baños
to talk with defendant's responsible officers in the hope of expecting payment, when, in truth and in fact,
defendant had no intention to pay whatsoever right from the start on a misplaced ground of
technicalities. Some of plaintiff's demand letters since year 1983 up to the present are hereto attached as
Annexes A, B, C, D, E, F, G, and H hereof;

6. That by reason of defendant's malicious, evil and unnecessary misrepresentations that it was going to
pay its obligation and asking plaintiff so many red tapes and requirements to submit, compliance of all of
which took plaintiff almost eight (8) years to finish, when, in truth and in fact, defendant had no
intention to pay, defendant should be ordered to pay plaintiff no less than PESOS: ONE HUNDRED
THOUSAND (P100,000.00) exemplary damages, so that other government institutions may be warned
that they must not unjustly enrich themselves at the expense of the people they serve. 23

In its answer, UP denied liability and alleged that PHILAB had no cause of action against it because it was merely the
donee/beneficiary of the laboratory furniture in the BIOTECH; and that the FEMF, which funded the project, was
liable to the PHILAB for the purchase price of the laboratory furniture. UP specifically denied obliging itself to pay
for the laboratory furniture supplied by PHILAB.

After due proceedings, the trial court rendered judgment dismissing the complaint without prejudice to PHILAB's
recourse against the FEMF. The fallo of the decision reads:

WHEREFORE, this case is hereby DISMISSED for lack of merit without prejudice to plaintiff's
recourse to the assets of the Marcos Foundation for the unpaid balance of P792,939.49.

SO ORDERED.24

Undaunted, PHILAB appealed to the Court of Appeals (CA) alleging that the trial court erred in finding that:

1. the contract for the supply and installation of subject laboratory furniture and equipment was between
PHILAB and the Marcos Foundation; and,

2. the Marcos Foundation, not the University of the Philippines, is liable to pay the respondent the
balance of the purchase price.25

The CA reversed and set aside the decision of the RTC and held that there was never a contract between FEMF and
PHILAB. Consequently, PHILAB could not be bound by the MOA between the FEMF and UP since it was never a
party thereto. The appellate court ruled that, although UP did not bind itself to pay for the laboratory furniture;
nevertheless, it is liable to PHILAB under the maxim: "No one should unjustly enrich himself at the expense of
another."

77
 The Present Petition

Upon the denial of its motion for reconsideration of the appellate court's decision, UP, now the petitioner, filed its
Petition for Review contending that:

I. THE COURT OF APPEALS ERRED WHEN IT FAILED TO APPLY THE LAW ON CONTRACTS
BETWEEN PHILAB AND THE MARCOS FOUNDATION.

II. THE COURT OF APPEALS ERRED IN APPLYING THE LEGAL PRINCIPLE OF UNJUST
ENRICHMENT WHEN IT HELD THAT THE UNIVERSITY, AND NOT THE MARCOS
FOUNDATION, IS LIABLE TO PHILAB.26

Prefatorily, the doctrinal rule is that pure questions of facts may not be the subject of appeal by certiorari under Rule
45 of the 1997 Rules of Civil Procedure, as this mode of appeal is generally restricted to questions of law. 27 However,
this rule is not absolute. The Court may review the factual findings of the CA should they be contrary to those of the
trial court.28 Correspondingly, this Court may review findings of facts when the judgment of the CA is premised on a
misapprehension of facts.29

On the first assigned error, the petitioner argues that the CA overlooked the evidentiary effect and substance of the
corresponding letters and communications which support the statements of the witnesses showing affirmatively that an
implied contract of sale existed between PHILAB and the FEMF. The petitioner furthermore asserts that no contract
existed between it and the respondent as it could not have entered into any agreement without the requisite public
bidding and a formal written contract.

The respondent, on the other hand, submits that the CA did not err in not applying the law on contracts between the
respondent and the FEMF. It, likewise, attests that it was never privy to the MOA entered into between the petitioner
and the FEMF. The respondent adds that what the FEMF donated was a sum of money equivalent to P29,000,000, and
not the laboratory equipment supplied by it to the petitioner. The respondent submits that the petitioner, being the
recipient of the laboratory furniture, should not enrich itself at the expense of the respondent.

The petition is meritorious.

It bears stressing that the respondent's cause of action is one for sum of money predicated on the alleged promise of
the petitioner to pay for the purchase price of the furniture, which, despite demands, the petitioner failed to do.
However, the respondent failed to prove that the petitioner ever obliged itself to pay for the laboratory furniture
supplied by it. Hence, the respondent is not entitled to its claim against the petitioner.

There is no dispute that the respondent is not privy to the MOA executed by the petitioner and FEMF; hence, it is not
bound by the said agreement. Contracts take effect only between the parties and their assigns. 30 A contract cannot be
binding upon and cannot be enforced against one who is not a party to it, even if he is aware of such contract and has
acted with knowledge thereof. 31 Likewise admitted by the parties, is the fact that there was no written contract
executed by the petitioner, the respondent and FEMF relating to the fabrication and delivery of office and laboratory
furniture to the BIOTECH. Even the CA failed to specifically declare that the petitioner and the respondent entered
into a contract of sale over the said laboratory furniture. The parties are in accord that the FEMF had remitted to the
respondent partial payments via checks drawn and issued by the FEMF to the respondent, through Padolina, in the
total amount of P2,288,573.74 out of the total cost of the project of P2,934,068.90 and that the respondent received the
said checks and issued receipts therefor to the FEMF. There is also no controversy that the petitioner did not pay a
single centavo for the said furniture delivered by the respondent that the petitioner had been using ever since.

We agree with the petitioner that, based on the records, an implied-in-fact contract of sale was entered into between
the respondent and FEMF. A contract implied in fact is one implied from facts and circumstances showing a mutual
intention to contract. It arises where the intention of the parties is not expressed, but an agreement in fact creating an
obligation. It is a contract, the existence and terms of which are manifested by conduct and not by direct or explicit
words between parties but is to be deduced from conduct of the parties, language used, or things done by them, or
other pertinent circumstances attending the transaction. To create contracts implied in fact, circumstances must
warrant inference that one expected compensation and the other to pay.32 An implied-in-fact contract requires the
parties' intent to enter into a contract; it is a true contract. 33 The conduct of the parties is to be viewed as a reasonable
man would view it, to determine the existence or not of an implied-in-fact contract. 34 The totality of the acts/conducts
of the parties must be considered to determine their intention. An implied-in-fact contract will not arise unless the
meeting of minds is indicated by some intelligent conduct, act or sign. 35
78
In this case, the respondent was aware, from the time Padolina contacted it for the fabrication and supply of the
laboratory furniture until the go-signal was given to it to fabricate and deliver the furniture to BIOTECH as
beneficiary, that the FEMF was to pay for the same. Indeed, Padolina asked the respondent to prepare the draft of the
contract to be received by the FEMF prior to the execution of the parties (the respondent and FEMF), but somehow,
the respondent failed to prepare one. The respondent knew that the petitioner was merely the donee-beneficiary of the
laboratory furniture and not the buyer; nor was it liable for the payment of the purchase price thereof. From the
inception, the FEMF paid for the bills and statement of accounts of the respondent, for which the latter
unconditionally issued receipts to and under the name of the FEMF. Indeed, witness Lirio testified:

Q: Now, did you know, Mr. Witness, if PHILAB Industries was aware that it was the Marcos
Foundation who would be paying for this particular transaction for the completion of this particular
transaction?chanroblesvirtualawlibrary

A: I think they are fully aware.

Q: What is your basis for saying so?chanroblesvirtualawlibrary

A: First, I think they were appraised by Dr. Padolina. Secondly, there were occasions during our
inspection in Los Baños, at the installation site, there were occasions, two or three occasions, when we
met with Mr. Navasero who is the President, I think, or manager of PHILAB, and we appraised him that
it was really between the foundation and him to which includes (sic) the construction company
constructing the building. He is fully aware that it is the foundation who (sic) engaged them and issued
the payments.36

The respondent, in its Letter dated March 26, 1986, informed the petitioner and sought its assistance for the collection
of the amount due from the FEMF:

Dear Dr. Padolina:

May we request for your much-needed assistance in the payment of the balance still due us on the
laboratory furniture we supplied and installed two years ago?chanroblesvirtualawlibrary

Business is still slow and we will appreciate having these funds as soon as possible to keep up our
operations.

We look forward to hearing from you regarding this matter.

Very truly yours,

PHILAB INDUSTRIES, INC.37

The respondent even wrote former President Aquino seeking her assistance for the payment of the amount due, in
which the respondent admitted it tried to collect from her predecessor, namely, the former President Ferdinand E.
Marcos:

YOUR EXCELLENCY:

At the instance of the national government, subject laboratory furnitures were supplied by our company
to the National Institute of Biotechnology & Applied Microbiology (BIOTECH), University of the
Philippines, Los Baños, Laguna, in 1984.

Out of the total contract price of PESOS: TWO MILLION NINE HUNDRED THIRTY-NINE
THOUSAND FIFTY-EIGHT & 90/100 (P2,939,058.90), the previous administration had so far paid us
the sum of P2,236,119.52 thus leaving a balance of PESOS: ONE MILLION FOUR HUNDRED
TWELVE THOUSAND SEVEN HUNDRED FORTY-EIGHT & 61/100 (P1,412.748.61) inclusive of
interest of 24% per annum and 30% exchange rate adjustment.

On several occasions, we have tried to collect this amount from your predecessor, the latest of which
was subject invoice (01643) we submitted to DR. W. PADOLINA, deputy director of BIOTECH. But

79
 this, notwithstanding, our claim has remained unacted upon up to now. Copy of said invoice is hereto
attached for easy reference.

Now that your excellency is the head of our government, we sincerely hope that payment of this
obligation will soon be made as this is one project the Republic of the Philippines has use of and derives
benefit from.38

Admittedly, the respondent sent to the petitioner its bills and statements of accounts for the payments of the laboratory
furniture it delivered to the petitioner which the petitioner, through Padolina, transmitted to the FEMF for its payment.
However, the FEMF failed to pay the last statement of account of the respondent because of the onset of the EDSA
upheaval. It was only when the respondent lost all hope of collecting its claim from the government and/or the PCGG
did it file the complaint against the petitioner for the collection of the payment of its last delivery of laboratory
furniture.

We reject the ruling of the CA holding the petitioner liable for the claim of the respondent based on the maxim that no
one should enrich itself at the expense of another.

Unjust enrichment claims do not lie simply because one party benefits from the efforts or obligations of others, but
instead it must be shown that a party was unjustly enriched in the sense that the term unjustly could mean illegally or
unlawfully.39

Moreover, to substantiate a claim for unjust enrichment, the claimant must unequivocally prove that another party
knowingly received something of value to which he was not entitled and that the state of affairs are such that it would
be unjust for the person to keep the benefit.40 Unjust enrichment is a term used to depict result or effect of failure to
make remuneration of or for property or benefits received under circumstances that give rise to legal or equitable
obligation to account for them; to be entitled to remuneration, one must confer benefit by mistake, fraud, coercion, or
request.41 Unjust enrichment is not itself a theory of reconvey. Rather, it is a prerequisite for the enforcement of the
doctrine of restitution.42

Article 22 of the New Civil Code reads:

Every person who, through an act of performance by another, or any other means, acquires or comes into
possession of something at the expense of the latter without just or legal ground, shall return the same to
him. (Boldface supplied)

In order that accion in rem verso may prosper, the essential elements must be present: (1) that the defendant has been
enriched, (2) that the plaintiff has suffered a loss, (3) that the enrichment of the defendant is without just or legal
ground, and (4) that the plaintiff has no other action based on contract, quasi-contract, crime or quasi-delict. 43

An accion in rem verso is considered merely an auxiliary action, available only when there is no other remedy on
contract, quasi-contract, crime, and quasi-delict. If there is an obtainable action under any other institution of positive
law, that action must be resorted to, and the principle of accion in rem verso will not lie.44

The essential requisites for the application of Article 22 of the New Civil Code do not obtain in this case. The
respondent had a remedy against the FEMF via an action based on an implied-in-fact contract with the FEMF for the
payment of its claim. The petitioner legally acquired the laboratory furniture under the MOA with FEMF; hence, it is
entitled to keep the laboratory furniture.

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The assailed Decision of the Court of
Appeals is REVERSED AND SET ASIDE. The Decision of the Regional Trial Court, Makati City, Branch 150, is
REINSTATED. No costs.

SO ORDERED.

80